Question

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  .

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