Rapid Delivery, Inc., is considering the purchase of an additional delivery vehi

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.

0.162

a. Determine the expected annual net cash flows from the delivery truck investment for 2016-2020.

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.

$

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

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Explanation / Answer

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

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