Question

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	$

Answer 1

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