Question

A truck can be purchased for $150 000 and is expected to have a resale value of $40 000 at the end of 5 years. The truck is expected to generate cash inflows of $80 000 per annum over the 5 years and its operating costs are expected to be $30 000 per annum. If the required rate of return is 15 per cent, what is the NPV of the truck?

Answer 1

ANS: Calculation of NPV of the Truck (Currency is $)

The Cash flow is to br taken as Net ( Cash Inflow - Operating expenses)

= $80000 - $30000

= $ 50000

Year	Net Cash Flow	PVF @ 15%	PV of Cash flow
0	-150000	1	-150000
1	50000	0.869	43450
2	50000	0.756	37800
3	50000	0.657	32850
4	50000	0.572	28600
5	50000	0.497	24850
5	40000	0.497	19880
	Net Present value		37430

As the NPV is positive, Truck should be purchased.

Note : Resale value i.e Terminal value is at end of 5th year, so PVF@15% for 5th year is taken.