Courier Express, Inc., is considering the purchase of an additional delivery veh
ID: 2344476 • Letter: C
Question
Courier Express, Inc., is considering the purchase of an additional delivery vehicle for $48,000 on January 1, 2012. The truck is expected to have a five-year life with an expected residual value of $12,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $62,000 per year for each of the next five years. A driver will cost $45,000 in 2012, with an expected annual salary increase of $2,000 for each year thereafter. The insurance for the truck is estimated to cost $3,000 per year.
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
a. Determine the expected annual net cash flows from the delivery truck investment for 2012-2016.
Annual Net Cash Flow
2012 $
2013 $
2014 $
2015 $
2016 $
b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%. (If required, round to the nearest dollar.) Use the table of the present value of $1 presented above. If required, use the minus sign to indicate a negative net present value.
Present value of annual net cash flow: $
Less investment: $
Net present value: $
Explanation / Answer
Solution:
a. Assume straight line depreciation, which is $27,000 per year.
Total expenses are $135,000.
Total expenses less depreciation is $108,000.
Revenue is $163,000.
Net cash flow excludes depreciation. Depreciation is not part of cash flow calculations. Depreciation is really for tax purposes but doesn't affect cash flow.
So, $163,000 - $108,000 is $55,000. (Revenue minus (total expenses minus depreciation) equals net cash).
b.
Present value of annual net cash flow: $23,000
Less investment: $12,999
Net present value: $10,000