Net Present Value Method Rapid Delivery, Inc., is considering the purchase of an
ID: 2407385 • Letter: N
Question
Net Present Value Method
Rapid Delivery, Inc., is considering the purchase of an additional delivery vehicle for $57,000 on January 1, 2016. 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 $77,000 per year for each of the next five years. A driver will cost $54,000 in 2016, with an expected annual salary increase of $4,000 for each year thereafter. The annual operating costs for the truck are estimated to be $3,000 per year.
a. Determine the expected annual net cash flows from the delivery truck investment for 2016-2020.
b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 6%. 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.
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 0.162Explanation / Answer
a. Expected annual net cash flows from the delivery truck investment for 2016 – 2020
Year
Additional Revenue
Driver Salary
Operating cost
Salvage Value
Annual Net Cash Flow
2016
77,000
54,000
3,000
-
20,000
2017
77,000
58,000
3,000
-
16,000
2018
77,000
62,000
3,000
-
12,000
2019
77,000
66,000
3,000
-
8,000
2020
77,000
70,000
3,000
5,000
9,000
b. Net present value of the investment
Present value of annual net cash flow
$56,239
Less : Investment
($57,000)
Net present value [NPV]
- $761 [Negative NPV]
Present value of annual net cash flow
= (20,000 x 0.943) + (16,000 x 0.890) + (12,000 x 0.840) + (8,000 x 0.792) + (9,000 x 0.747)
= $56,239
Year
Additional Revenue
Driver Salary
Operating cost
Salvage Value
Annual Net Cash Flow
2016
77,000
54,000
3,000
-
20,000
2017
77,000
58,000
3,000
-
16,000
2018
77,000
62,000
3,000
-
12,000
2019
77,000
66,000
3,000
-
8,000
2020
77,000
70,000
3,000
5,000
9,000