Rapid parcel Sservice has been offfered an eight-year contract to deliver mail a
ID: 2361537 • Letter: R
Question
Rapid parcel Sservice has been offfered an eight-year contract to deliver mail and small parcels between army installations. tp accept the contract, the company would have to purchase several new delivery trucks at a total cost $450,000. Other data relating to the contract follow: Annual net cash flow receipts (before taxes) from the contract $108,000 Cost of overhauling the motors in the trucls for 5 year $45,000 Salvage of the trucks at the termination of the contract $20,000 If the contract were accepted, several old, fully depreciated trucks would be sold at a total proce of $30,000. These funds would be used to help purchase the new trucks, for tax purposes, the company computes deprciation deductions assuming zero salvage value and uses straight-line depreciation. The trucks wold be depreciated over eight years. The company requires a 12% after tax return on all equipment purchases. The tax rate is 30% required: Compute the net present calue of this investment opportunity. Repond all dollar amount to the nearest whole dollar, Would you recommend thta the contract be accepted.Explanation / Answer
Y0: Initial Costs: (450000) Truck Sales 30000 Total (420000) Y1-Y4: Inflows 108000 Tax (30%) (32400) Total 75600 Annuity Factor= x 3.037 (From table for 12% return on 4yrs) Present Values= 229597 Y5: Inflows 108000 Mot Overhauls (45000) Total 63000 Tax(30%) (18900) = 44100 Discount factor 12%= x0.567 (PV factor for 5th yr) PV= 25005 Y6: Inflows 108000 Tax (30%) (32400) Total 75600 PV factor= x0.507 PV= 38329 Y7: Inflows 108000 Tax (30%) (32400) Total 75600 PV factor= x0.452 PV= 34171 Y8: Inflows 108000 Tax (30%) (32400) Scrap 20000 Total 95600 PV factor= x0.404 PV= 38622 Therefore NET PRESENT VALUE for each one of the investment projects: (420000)+229597+25005+38329+34171+38622 = (54276) answer therefore the projects should not be taken as they present a negative value in terms of present values.
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