Net Present Value Method On Time Delivery Inc. is considering the purchase of an
ID: 2525034 • Letter: N
Question
Net Present Value Method On Time Delivery Inc. is considering the purchase of an additional delivery truck for $41,000 on January 1, 20Y4. The truck is expected to have a five-year life with an expected residual value of $5,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $76,000 per year for each of the next five years. A driver will cost $55,000 in 20Y4, with an expected annual salary increase of $4,000 for each year thereafter. The operating costs for the truck is estimated to cost $3,000 per year. Present Value of $1 at Compound Interest Year 10% 6% 0.943 0.890 0.840 0.792 0.747 0.621 0.705 0.665 0.513 0.627 0.467 0.404 0.592 0.558 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 12% 0.826 0.797 0.712 0.683 0.636 15% 0.909 0.893 0.870 0.756 0.658 0.572 0.751 0.567 0.4 0.507 0.452 6 0.432 0.376 0.327 0.284 0.247 0.564 0.424 0.361 10 0.386 0.322Explanation / Answer
a.
Annual Cash Flow
20Y4
$ 18,000
20Y5
$ 14,000
20Y6
$ 10,000
20Y7
$ 6,000
20Y8
$ 7,000
Explanation:
Year 20Y4 cash flow = Annual revenue – Driver cost – operating cost
= $ 76,000 - $ 55,000 - $ 3,000 = $ 18,000
Year 20Y5 cash flow = Annual revenue – Driver cost – operating cost
= $ 76,000 – ($ 55,000 + $ 4,000) - $ 3,000
= $ 76,000 – $ 59,000 - $ 3,000 = $ 14,000
Year 20Y6 cash flow = Annual revenue – Driver cost – operating cost
= $ 76,000 – ($ 59,000 + $ 4,000) - $ 3,000
= $ 76,000 – $ 63,000 - $ 3,000 = $ 10,000
Year 20Y7 cash flow = Annual revenue – Driver cost – operating cost
= $ 76,000 – ($ 63,000 + $ 4,000) - $ 3,000
= $ 76,000 – $ 67,000 - $ 3,000 = $ 6,000
Year 20Y8 cash flow = Annual revenue + residual value – Driver cost – operating cost
= $ 76,000 + $ 5,000 – ($ 67,000 + $ 4,000) - $ 3,000
= $ 81,000 – $ 71,000 - $ 3,000 = $ 7,000
b.
Year
Cash Flow(C)
PV Factor(F)
PV( C x F)
1
$ 18,000
0.870
$ 15,660.00
2
$ 14,000
0.756
$ 10,584.00
3
$ 10,000
0.658
$ 6,580.00
4
$ 6,000
0.572
$ 3,432.00
5
$ 7,000
0.497
$ 3,479.00
Net Present Cash Flow
$ 39,735.00
Present value of annual net cash flows
$ 39,735
Less: Investment
$ 41,000
NPV
$ - 1,265
c.
Negative NPV indicates that the total present value of cash flows from delivery truck investment is less than purchase price of truck.
Hence option “a” correct answer.
Annual Cash Flow
20Y4
$ 18,000
20Y5
$ 14,000
20Y6
$ 10,000
20Y7
$ 6,000
20Y8
$ 7,000
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