Award: 20.00 points Vernon Delivery is a small company that transports business

Question

Award: 20.00 points Vernon Delivery is a small company that transports business packages between New Yo and Chicago. It operates a fleet of small vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between the depots in the two cities. Vernon Delivery recently acquired approximately $6.6 million of cash capital from its owners, and its president, George Hay, is trying to identify the most profitable way to invest these funds. Todd Payne, expand the fleet of city vans at a cost of $740,000. He argues that more vans would enabl the company to expand its services into new markets, thereby increasing the revenue base More specifically, he expects cash inflows to increase by $280,000 per year. The additiona vans are expected to have an average useful life of four years and a combined salvage alue of $102,000. Operating the vans will require additional working capital of $40,000, which will be recovered at the end of the fourth year the company's operations manager, believes that the money should be used to In contrast, Oscar Vance, the company's chief accountant, believes that the funds should be used to purchase large trucks to deliver the packages between the depots in the two cities The conversion process would produce continuing improvement in operating savings and reduce cash outflows as follows: Year 1 Year 2 Year 3 Year 4 $150,000 $%320,000 $398,000 $441.000 The large trucks are expected to cost $820,000 and to have a four-year useful life and a are expected to amount to $13,000. Vernon Delivery's management has established a 12 percent desired rate of return. (PV of $1 and PVA of $1) (Use appropriate factorfs) from the tables provided.) Required a.&b.; Determine the net present value and present value index for each investment alternative. (Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answers to 2 decimal places.) Purchase of City Purchase of Vans Trucks a. Altemative 1 (NPV) b. Alternative 2 (PVI)

Explanation / Answer

a Net Present Value Alternative 1 Year Inflows/outflows P VF @12% Present Value 0 -780000 1 -780000 1 280000 0.892857 249999.96 2 280000 0.797194 223214.32 3 280000 0.71178 199298.4 4 280000 0.635518 177945.04 4 102000 0.635518 64822.836 4 40000 0.635518 25420.72 npv 160701.276 Alternative 2 Year Inflows/outflows P VF @12% Present Value 0 -833000 1 -833000 1 150000 0.892857 133928.55 2 320000 0.797194 255102.08 3 398000 0.71178 283288.44 4 441000 0.635518 280263.438 4 73000 0.635518 46392.814 npv 165975.322 b Present Value Index Alternative 1 NPV/initial outflows 160701.3/780000 0.21 Alternative 2 NPV/initial outflows 165975/833000 0.20

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