AM Express Inc. is considering the purchase of an additional delivery vehicle for $55,000 on January 1, 2014

AM Express Inc. is considering the purchase of an additional delivery vehicle for $55,000 on January 1, 2014. The truck is expected to have a five-year life with an expected residual value of $15,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $58,000 per year for each of the next five years. A driver will cost $42,000 in 2014, with an expected annual salary increase of $1,000 for each year thereafter. The annual operating costs for the truck are estimated to be $3,000 per year.

a. Determine the expected annual net cash flows from the delivery truck investment for 2014–2018.

b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the present value of $1 table appearing in Exhibit 1 of this chapter.

c. Is the additional truck a good investment based on your analysis?

Answer:

a. 

2014 

2015 

2016 

2017 

Revenues………………… $ 58,000 $ 58,000 $ 58,000 $ 58,000 $ 58,000 

Driver salary……………… (42,000) (43,000) (44,000) (45,000) (46,000) 

Operating costs………… (3,000) (3,000) (3,000) (3,000) (3,000) 

Residual value……………          15,000 

Annual net cash flow…… $ 13,000 $ 12,000 $ 11,000 $ 10,000 $ 24,000 

b. Year 

2014 

2015 

2016 

2017 

Net Cash Flow Present Value Present Value of 

[from part (a)] of $1 at 12% Net Cash Flow 

$13,000 0.893 $11,609 

12,000 0.797 9,564 

11,000 0.712 7,832 

10,000 0.636 6,360 

2018 24,000 0.567   13,608 

Total present value of cash flows………………………………………… $48,973 

Less investment in delivery truck…………………………………………   55,000 

Net present value of delivery truck……………………………………… $ (6,027) 

c. The total present value of cash flows from the delivery truck investment is 

less than the total purchase price of the truck. That is, the net present value 

is negative. Thus, this analysis does not support investment in the truck.