Question

Net Present Value Method for a Service Company

Coast-to-Coast Inc. is considering the purchase of an additional delivery vehicle for \$41,000 on January 1, 20Y1. The truck is expected to have a five-year life with an expected residual value of \$5,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be \$75,000 per year for each of the next five years. A driver will cost \$52,000 in 20Y1, with an expected annual salary increase of \$4,000 for each year thereafter. The annual operating costs for the truck are estimated to be \$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 20Y1-20Y5.

 Annual Net Cash Flow 20Y1 \$ 20Y2 \$ 20Y3 \$ 20Y4 \$ 20Y5 \$

b. Compute 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.

 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

#### Homework Answers

Answer #1

a. Determine the expected annual net cash flows from the delivery truck investment for 20Y1-20Y5.

 Annual Net Cash Flow 20Y1 \$75000-52000-3000-41000 = -21000 20Y2 \$20000-4000 = 16000 20Y3 \$16000-4000 = 12000 20Y4 \$12000-4000 = 8000 20Y5 \$8000-4000 = 4000+5000 = 9000

b. Compute 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.

 Present value of annual net cash flows \$42186 Investment -41000 Net present value \$1186

c. Is the additional truck a good investment based on your analysis?
,Yes because the net present value is positive

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