Net Present Value Method for a Service Company

Coast$-$to$-$Coast Inc. is considering the purchase of an additional delivery vehicle for $$38,000$ on January $1,20$Y$1.$ The truck is expected to have a five$-$year life with an expected

residual value of $$7,000$ at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $$56,000$ per year for each of the next

five years. A driver will cost $$39,000$ in $20Y1,$ with an expected annual salary increase of $$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

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

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

Annual Net Cash Flow

b$.$ Compute the net present value of the investment, assuming that the minimum desired rate of return is $15\%.$ 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

Investment

Net present value

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

$,$ because the net present value is neqative $.$