Question

# Rapid Delivery, Inc., is considering the purchase of an additional delivery vehicle for \$30,000 on January...

Rapid Delivery, Inc., is considering the purchase of an additional delivery vehicle for \$30,000 on January 1, 2016. The truck is expected to have a five-year life with an expected residual value of \$5,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be \$48,000 per year for each of the next five years. A driver will cost \$33,000 in 2016, with an expected annual salary increase of \$3,000 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 2016-2020.

 Annual Net Cash Flow 2016 \$ 2017 \$ 2018 \$ 2019 \$ 2020 \$

b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%. 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 flow \$ Less investment \$ Net present value \$

 a Annual net cash flow 2016 13000 2017 10000 2018 7000 2019 4000 2020 6000 b Present value of annual net cash flow 30509 Less investment 30000 Net present value 509 Workings: a Year 2016 2017 2018 2019 2020 Revenues 48000 48000 48000 48000 48000 Driver's salary -33000 -36000 -39000 -42000 -45000 Annual operating costs -2000 -2000 -2000 -2000 -2000 Residual value 5000 Annual net cash flow 13000 10000 7000 4000 6000 b Year 2016 2017 2018 2019 2020 Annual net cash flow 13000 10000 7000 4000 6000 PV factor 0.893 0.797 0.712 0.636 0.567 Present value of cash flows 11609 7970 4984 2544 3402 Total Present value of cash flows 30509