evoker assignment-takeäinprogress false AM Express Inc. is considering the purch

Question

evoker assignment-takeäinprogress false AM Express Inc. is considering the purchase of an adsitional delivery vehidle for $33,000 on January 1, 20Y1. 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 adsitional revenues from the added delivery capacity are antiolpated to be $53,000 per year for each of the next five years. A driver will cost $47,000 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 $2,000 per year Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.943 0.9090.893 0870 0833 0.890 0.8260.7970.7560.694 3 0840 0.751 0.7120.6580.579 50.747 0.621 0.5670.4970.402 6 0,705 05640.5070.432 0.335 7 0.665 0513 0.452 0.3760.279 0.627 0.467 0.404 0327 0.233 0.592 0.4240.361 0.284 0.194 10 0.558 0.386 0.322 0.247 162 a. Determine the expected aneual net cash flows from the delivery truck Investment for 20Y1-20YS Annual Net Cash Flow b. Calculate 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 dollax f required, sse the minus sign to indicate a negative net present vale Present value of annual net cash flow Less investment Previcus SAMSUNG

Explanation / Answer

a. 20Y1 20Y2 20Y3 20Y4 20Y5 Revenues………………… $65,000 $65,000 $65,000 $65,000 $65,000 Driver salary……………… -47,000 -51,000 -55,000 -59,000 -63,000 Operating costs………… -2,000 -2,000 -2,000 -2,000 -2,000 Residual value……………    6,000 Annual net cash flow…… $16,000 $12,000 $8,000 $4,000 $6,000 b. Year Net Cash Flow Present Value Present Value of [from part (a)] of $1 at 15% Net Cash Flow 20Y1 $16,000 0.870 $                  13,920 20Y2 $12,000 0.756 $                    9,072 20Y3 $8,000 0.658 $                    5,264 20Y4 $4,000 0.572 $                    2,288 20Y5 $6,000 0.497 $                    2,982 Total present value of cash flows $             33,526 Less investment in delivery truck                33,000 Net present value of delivery truck $                 526 The total present value of cash flows from the delivery truck investment is more than the total purchase price of the truck. That is, the net present value is positive. Thus, this analysis support investment in the truck.

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