Question

AM Express Inc. is considering the purchase of an additional delivery vehicle for $40,000 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 $64,000 per year for each of the next five years. A driver will cost $44,000 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. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 15%. 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.

Answer 1

a.
			Annual Net Cash Flows
	20Y1		$       18,000
	20Y2		$       14,000
	20Y3		$       10,000
	20Y4		$         6,000
	20Y5		$         9,000
	Working:
		Revenue (1)	Driver's Salary (2)	Operating Cost (3)	Salvage Value of Machine(4)			Cash Flows (1)-(2)-(3)+(4)
	20Y1	64000	44000	2000				18000
	20Y2	64000	48000	2000				14000
	20Y3	64000	52000	2000				10000
	20Y4	64000	56000	2000				6000
	20Y5	64000	60000	2000	7000			9000
b.
	Net Present Value		$ 729
	working:
		Annual Cash flows		Present Value of 1		Present Value of Cash flows
	20Y1	18000		0.870		15660
	20Y2	14000		0.756		10584
	20Y3	10000		0.658		6580
	20Y4	6000		0.572		3432
	20Y5	9000		0.497		4473
	Total					40729
	Less:Cost of vehicle					40000
	Net Present Value					729