Question

Perez Delivery is a small company that transports business packages between New York and Chicago. It operates a fleet of small vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between the depots in the two cities. Perez Delivery recently acquired approximately $6.4 million of cash capital from its owners, and its president, George Hay, is trying to identify the most profitable way to invest these funds.

  

Todd Payne, the company’s operations manager, believes that the money should be used to expand the fleet of city vans at a cost of $660,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the revenue base. More specifically, he expects cash inflows to increase by $330,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $97,000. Operating the vans will require additional working capital of $45,000, which will be recovered at the end of the fourth year.

  

In contrast, Oscar Vance, the company’s chief accountant, believes that the funds should be used to purchase large trucks to deliver the packages between the depots in the two cities. The conversion process would produce continuing improvement in operating savings and reduce cash outflows as follows:

  

Year 1			Year 2			Year 3			Year 4
	$161,000			$315,000			$391,000			$435,000

  

The large trucks are expected to cost $740,000 and to have a four-year useful life and a $84,000 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to $11,000. Perez Delivery’s management has established a 14 percent desired rate of return. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

  

Required

1. a.&b. Determine the net present value and present value index for each investment alternative. (Enter answers in whole dollar, not in million. Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answers to 2 decimal places.)

	Purchase of City Vans Purchase of Trucks a. Net Present Value (NPV) b. Present Value Index (PVI)

Answer 1

Answer to question

Particulars	Purchase of City Vans	Purchase of Trucks
Cash Out flow
Investment in Van		6,60,000.00				7,40,000
Working capital		45000				0
training costs						11000
Totaal Cash Out flow			7,05,000.00			7,51,000
Cash Inflow
Year	Discount Factor	Cash Flow	Discounted Cashflow		Cash Flow	Discounted Cashflow
1	0.8772	3,30,000	289473.6842		1,61,000	141228.0702
2	0.7695	3,30,000	253924.2844		3,15,000	242382.2715
3	0.6750	3,30,000	222740.6003		3,91,000	263913.8628
4	0.5921	4,72,000	279461.8909		5,19,000	307289.664
			1045600.46			954813.8684
Net Present Value (NPV)	Cash inflow - Cash outflow		3,40,600.46			2,03,813.87
Present Value Index (PVI)	Cash inflow/cash outflow		1.48			1.27
Its Better to purchase Van as its NPV and PVI is greter than of Truck purchase