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 $37,000 on January 1, 2012. 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 $57,000 per year for each of the next five years. A driver will cost $40,000 in 2012, with an expected annual salary increase of $3,000 for each year thereafter. The insurance for the truck is estimated to cost $2,000 per year.

a. Determine the expected annual net cash flows from the delivery truck investment for 2012-2016.

b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%. 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.

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

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

Explanation / Answer

a.

Calculation of expected annual net cash flows from the delivery truck investment for 2012-2016:

2012

2013

2014

2015

2016

Expected Additional Revenue

$   57,000

$   57,000

$   57,000

$   57,000

$   57,000

Less: Cost of Driver

$ (40,000)

$ (43,000)

$ (46,000)

$ (49,000)

$ (52,000)

Less: Insurance Cost of Truck

$   (2,000)

$   (2,000)

$   (2,000)

$   (2,000)

$   (2,000)

Add: Residual Value of Truck

$      6,000

Net Cash Flows

$   15,000

$   12,000

$      9,000

$      6,000

$      9,000

b.

Calculation of Net present value:

2012

2013

2014

2015

2016

Net Cash Flows (CF)

$   15,000

$   12,000

$      9,000

$      6,000

$      9,000

Present value factor (PVF) at 12% (From table given)

0.893

0.797

0.712

0.636

0.567

Present value of cash flows =CF*PVF

$   13,395

$      9,564

$      6,408

$      3,816

$      5,103

Total Present value of cash flows

$   38,286

Less: amount of investment

$ (37,000)

Net Present value

$      1,286

c.

Net present value of the truck proposal is positive,

hence Yes, it is a good investment based on the analysis

a.

Calculation of expected annual net cash flows from the delivery truck investment for 2012-2016:

2012

2013

2014

2015

2016

Expected Additional Revenue

$   57,000

$   57,000

$   57,000

$   57,000

$   57,000

Less: Cost of Driver

$ (40,000)

$ (43,000)

$ (46,000)

$ (49,000)

$ (52,000)

Less: Insurance Cost of Truck

$   (2,000)

$   (2,000)

$   (2,000)

$   (2,000)

$   (2,000)

Add: Residual Value of Truck

$      6,000

Net Cash Flows

$   15,000

$   12,000

$      9,000

$      6,000

$      9,000

b.

Calculation of Net present value:

2012

2013

2014

2015

2016

Net Cash Flows (CF)

$   15,000

$   12,000

$      9,000

$      6,000

$      9,000

Present value factor (PVF) at 12% (From table given)

0.893

0.797

0.712

0.636

0.567

Present value of cash flows =CF*PVF

$   13,395

$      9,564

$      6,408

$      3,816

$      5,103

Total Present value of cash flows

$   38,286

Less: amount of investment

$ (37,000)

Net Present value

$      1,286

c.

Net present value of the truck proposal is positive,

hence Yes, it is a good investment based on the analysis

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