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Net Present Value Method for a Service Company Coast-to-Coast Inc. is considering the purchase of an...

Net Present Value Method for a Service Company

Coast-to-Coast Inc. is considering the purchase of an additional delivery vehicle for $39,000 on January 1, 20Y1. The truck is expected to have a five-year life with an expected residual value of $7,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $67,000 per year for each of the next five years. A driver will cost $46,000 in 20Y1, with an expected annual salary increase of $4,000 for each year thereafter. The annual operating costs for the truck are estimated to be $2,000 per year.

Present Value of $1 at Compound Interest
Year 6% 10% 12% 15% 20%
1 0.943 0.909 0.893 0.870 0.833
2 0.890 0.826 0.797 0.756 0.694
3 0.840 0.751 0.712 0.658 0.579
4 0.792 0.683 0.636 0.572 0.482
5 0.747 0.621 0.567 0.497 0.402
6 0.705 0.564 0.507 0.432 0.335
7 0.665 0.513 0.452 0.376 0.279
8 0.627 0.467 0.404 0.327 0.233
9 0.592 0.424 0.361 0.284 0.194
10 0.558 0.386 0.322 0.247 0.162

a. Determine the expected annual net cash flows from the delivery truck investment for 20Y1-20Y5.

Annual Net Cash Flow
20Y1 $
20Y2 $
20Y3 $
20Y4 $
20Y5 $

b. Compute the net present value of the investment, assuming that the minimum desired rate of return is 20%. Use the table of the present value of $1 presented above. When required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.

Present value of annual net cash flows $
Investment
Net present value $

c. Is the additional truck a good investment based on your analysis?
, because the net present value is  .

Homework Answers

Answer #1
Req a.
Annual Net cash flows
Year-1 YEar2 Year-3 Year-4 Year-5
Annual Incremental revenue 67000 67000 67000 67000 67000
Annual Driver salary -46000 -50000 -54000 -58000 -62000
Annual Operating cost -2000 -2000 -2000 -2000 -2000
Residual value 7000
Net cash Flows 19000 15000 11000 7000 10000
Year Annual cash net flows
2001 19000
2002 15000
2003 11000
2004 7000
2005 10000
Req b.
Year Annual cash net flows PVF at 20% Present value
2001 19000 0.833 15827
2002 15000 0.694 10410
2003 11000 0.579 6369
2004 7000 0.482 3374
2005 10000 0.402 4020
Present value of inflows 40,000
Less: Investment 39000
Net present value 1000
Yes, it is a good investment as NPV is positive
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