Question

Rapid Delivery, Inc., is considering the purchase of an additional delivery vehicle for $48,000 on January 1, 2016. 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 $68,000 per year for each of the next five years. A driver will cost $47,000 in 2016, 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 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 10%. 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	$

c. Is the additional truck a good investment based on your analysis?

Answer 1

Solution a:

Computation of expected annual cash flows from delivery truck
Particulars	2016	2017	2018	2019	2020
Additional annual revenue from delivery truck	$68,000.00	$68,000.00	$68,000.00	$68,000.00	$68,000.00
Less: Annual driver salary	$47,000.00	$51,000.00	$55,000.00	$59,000.00	$63,000.00
Less: Annual operating cost	$2,000.00	$2,000.00	$2,000.00	$2,000.00	$2,000.00
Expected annual cash flows	$19,000.00	$15,000.00	$11,000.00	$7,000.00	$3,000.00

Solution b:

Computation of NPV - Investment in Delivery Truck
Particulars	Period	PV Factor	Amount	Present Value
Cash outflows:
Cost of Delivery Truck	0	1	$48,000.00	$48,000.00
Present Value of Cash outflows (A)				$48,000.00
Cash Inflows
Annual increase in Cash Inflows:
2016	1	0.909	$19,000.00	$17,271.00
2017	2	0.826	$15,000.00	$12,390.00
2018	3	0.751	$11,000.00	$8,261.00
2019	4	0.683	$7,000.00	$4,781.00
2020	5	0.621	$3,000.00	$1,863.00
Salvage Value	5	0.621	$7,000.00	$4,347.00
Present Value of Cash Inflows (B)				$48,913.00
Net Present Value (NPV) (B-A)				$913.00

Solution c:

As NPV is postive, therefore additional truck is a good investment.