Net Present Value Method for a Service Company

AM Express Inc. is considering the purchase of an additional delivery vehicle for $$32,000$ on January $1,20$Y$1.$ The truck is expected to have a five$-$year life with an expected residual value of $$6,000$ at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $$51,000$ per year for each of the next five years. A driver will cost $$37,000$ in $20$Y$1,$ with an expected annual salary increase of $$3,000$ for each year thereafter. The annual operating costs for the truck are estimated to be $$2,000$ per year.

Present Value of $$1$ at Compound Interest

Year $6\%10\%12\%15\%20\%$

$10\mathrm{.}9430\mathrm{.}9090\mathrm{.}8930\mathrm{.}8700\mathrm{.}833$

$20\mathrm{.}8900\mathrm{.}8260\mathrm{.}7970\mathrm{.}7560\mathrm{.}694$

$30\mathrm{.}8400\mathrm{.}7510\mathrm{.}7120\mathrm{.}6580\mathrm{.}579$

$40\mathrm{.}7920\mathrm{.}6830\mathrm{.}6360\mathrm{.}5720\mathrm{.}482$

$50\mathrm{.}7470\mathrm{.}6210\mathrm{.}5670\mathrm{.}4970\mathrm{.}402$

$60\mathrm{.}7050\mathrm{.}5640\mathrm{.}5070\mathrm{.}4320\mathrm{.}335$

$70\mathrm{.}6650\mathrm{.}5130\mathrm{.}4520\mathrm{.}3760\mathrm{.}279$

$80\mathrm{.}6270\mathrm{.}4670\mathrm{.}4040\mathrm{.}3270\mathrm{.}233$

$90\mathrm{.}5920\mathrm{.}4240\mathrm{.}3610\mathrm{.}2840\mathrm{.}194$

$100\mathrm{.}5580\mathrm{.}3860\mathrm{.}3220\mathrm{.}2470\mathrm{.}162$

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

Annual Net Cash Flow

$20$Y$1$ $

fill in the blank $1$

$20$Y$2$ $

fill in the blank $2$

$20$Y$3$ $

fill in the blank $3$

$20$Y$4$ $

fill in the blank $4$

$20$Y$5$ $

fill in the blank $5$

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 annual net cash flows $

fill in the blank $6$

Investment $

fill in the blank $7$

Net present value $

fill in the blank $8$

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

$,$ because the net present value is

$.$