EX $24-8$ Net present value method for a service company

Obj. $3$

a$.20Y1,$$$19,000$

Coast$-$to$-$Coast Inc. is considering the purchase of an additional delivery vehicle for $$70,000$ on January $1,20Y1.$ The truck is expected to have a $5-$year life with an expected residual value of $$15,000$ at the end of $5$ years. The expected additional revenues from the added delivery capacity are anticipated to be $$65,000$ per year for each of the next $5$ years. A driver will cost $$40,000$ in $20Y1,$ with an expected annual salary increase of $$2,000$ for each year thereafter. The annual operating costs for the truck are estimated to be $$6,000$ per year.

a$.$ Determine the expected annual net cash flows from the delivery truck investment for $20$Y$1-20$Y$5.$

b$.$ Compute the net present value of the investment, assuming that the minimum desired rate of return is $12\%.$ Use the present value table appearing in Exhibit $2$ of this chapter.

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