Net Present Value Method for a Service Company AM Express Inc. is consider ng th

Question

Net Present Value Method for a Service Company AM Express Inc. is consider ng the purchase o an additional delivery vehicle for 36 000 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 additional evenues from the added delivery capacity are anticipated to be $67,000 per year for each of the next five years. A driver will cost $49,000 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 10% 15% 12% 0.943 0.909 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.840 0.75 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0.567 0497 0.402 0.705 0,564 0.507 0.432 0,335 0.665 0,513 0.452 0.376 0,279 0.627 0.467 0.404 0.327 0.233 0.592 0.424 0.361 0.284 0.194 0.558 0.386 0.322 0.247 0.162 20% 10 a. Determine the expected annual net cash flows from the delivery truck investment for 20Y1-20YS 20Y1 20Y2 20Y3 20Y4 20Y5 Annual Net Cash Flow 16,000 12,000 8,000 4,000

Explanation / Answer

a. Annual Net Cash Flow

b. Net Present Value

c. Additional truck is a good investment, because the net present value is positive.

20Y1 ($67,000 - $49,000 - $2,000) $16,000 20Y2 ($67,000 - $53,000 - $2,000) $12,000 20Y3 ($67,000 - $57,000 - $2,000) $8,000 20Y4 ($67,000 - $61,000 - $2,000) $4,000 20Y5 ($67,000 + $6,000 - $65,000 - $2,000) $6,000

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