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 $42, 000 on January 1, 2014. 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 $69, 000 per year for each of the next five years. A driver will cost $47, 000 in 2014, 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. Determine the expected annual net cash flows from the delivery truck investment for 2014-2018. 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.

Explanation / Answer

a)

Investment is made = (42000)

Year 2014

69000 - 47000 - 2000 = $ 20000

Year 2015

69000 - 51000 - 2000 = $16000

Year 2016

69000 - 55000 - 2000 = $ 12000

Year 2017

69000 - 59000 - 2000 = $ 8000

Year 2018

69000 - 63000 - 2000 + 7000 = $ 11000

b)

Year Cash Flow PVF 20% PV 0          (42,000) 1         (42,000) 1            20,000 0.833            16,660 2            16,000 0.694            11,104 3            12,000 0.579              6,948 4               8,000 0.482              3,856 5            11,000 0.402              4,422 NPV                  990

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