Question

Rapid Delivery, Inc., is considering the purchase of an additional delivery vehicle for $24,000 on January 1, 2016. The truck is expected to have a five-year life with an expected residual value of $6,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $51,000 per year for each of the next five years. A driver will cost $37,000 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.

Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.87	0.833
2	0.89	0.826	0.797	0.756	0.694
3	0.84	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 20%. 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		$      12,000
2017		9,000
2018		6,000
2019		3,000
2020		6000
Working:
	Year	2016	2017	2018	2019	2020
	Revenue	51,000	51,000	51,000	51,000	51,000
	Cost of Driver	-37,000	-40,000	-43,000	-46,000	-49,000
	Operating Cost	-2,000	-2,000	-2,000	-2,000	-2,000
	Salvage value of asset					6,000
	Annual Cash flow	12,000	9,000	6,000	3,000	6,000
b.
	Present Value of annual Net Cash inflow				$       23,574
	Less Investment				24,000
	Net Present Value				-426
	Working:
	Year	2016	2017	2018	2019	2020		Total
	Annual Cash flow	12000	9000	6000	3000	6,000
	Discount factor @ 20%	0.833	0.694	0.579	0.482	0.402
	Present Value	9,996	6,246	3,474	1,446	2412		23,574