Net Present Value Method

Rapid Delivery Inc. is considering the purchase of an additional delivery vehicle for $38,000 on January 1, 20Y4. 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 $71,000 per year for each of the next five years. A driver will cost $50,000 in 20Y4, with an expected annual salary increase of $4,000 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 20Y420Y8. (Hints: Calculate the annual net cash flow by combining the additional revenue for each year, which would be a cash inflow, with the additional expected costs each year, which would be cash outflows. For every year after the first year, net cash flows are the same as the first year, except salary costs increase each year, which would make the annual net cash flow decrease each year. Also, in the final year, remember to add the residual value, because that would be a cash inflow from the sale of the truck.)

If an annual net cash flow is an outflow, use a minus sign in front of the number.

Annual Net Cash Flow

1. 20Y4 $______

2. 20Y5 $______

3. 20Y6 $______

4. 20Y7 $______

5. 20Y8 $______

b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 20%. Use the table of present value of $1 provided above. Enter the investment with a minus sign to show it is a cash outflow. If net present value is negative, use a minus sign.

6. Present value of annual net cash flow $______

7. Investment _______

8. Net present value $_______