Rapid Delivery Inc is considering the purchase of an additio

Rapid Delivery, Inc., is considering the purchase of an additional delivery vehicle for $24,000 on January 1, 2016. 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 2016, 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.

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a. Determine the expected annual net cash flows from the delivery truck investment for 2016-2020.

2020

b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 20%. 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.

$

Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.87	0.833
2	0.89	0.826	0.797	0.756	0.694
3	0.84	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

Solution

a. Annual Net Cash flow 2016 $      12,000 2017            9,000 2018            6,000 2019            3,000 2020 6000 Working: Year 2016 2017 2018 2019 2020 Revenue          51,000          51,000        51,000           51,000        51,000 Cost of Driver        -37,000        -40,000       -43,000          -46,000       -49,000 Operating Cost           -2,000           -2,000         -2,000            -2,000         -2,000 Salvage value of asset           6,000 Annual Cash flow          12,000            9,000           6,000 3,000           6,000 b. Present Value of annual Net Cash inflow $       23,574 Less Investment           24,000 Net Present Value -426 Working: Year 2016 2017 2018 2019 2020 Total Annual Cash flow 12000 9000 6000 3000 6,000 Discount factor @ 20% 0.833 0.694 0.579 0.482 0.402 Present Value 9,996 6,246 3,474 1,446 2412      23,574