Benson Delivery is a small company that transports business packages between New York 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. Benson Delivery recently acquired approximately $5.8 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, the companys operations manager, believes that the money should be used to expand the fleet of city vans at a cost of $810,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the revenue base. More specifically, he expects cash inflows to increase by $310,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $103,000. Operating the vans will require additional working capital of $48,000, which will be recovered at the end of the fourth year.
In contrast, Oscar Vance, the companys 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 |
| | $164,000 | | | $326,000 | | | $396,000 | | | $445,000 | |
| |
The large trucks are expected to cost $890,000 and to have a four-year useful life and a $72,000 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to $14,000. Benson Deliverys management has established a 14 percent desired rate of return. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Required
- a.&b. Determine the net present value and present value index for each investment alternative. (Enter answers in whole dollar, not in million. Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answers to 2 decimal places.)
Check my work Benson Delivery is a small company that transports business packages between New York 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. Benson Delivery recently acquired approximately $5.8 million of cash capital from its owners, and its president, George Hay, is trying to identify the most profitable way to invest these funds. 2.5 points eBook Todd Payne, the company's operations manager, believes that the money should be used to expand the fleet of city vans at a cost of $810,000. He argues that more vans would enable the company to expand its services into new markets, thereby increasing the revenue base. More specifically, he expects cash inflows to increase by $310,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $103,000. Operating the vans will require additional working capital of $48,000, which will be recovered at the end of the fourth year. Print References 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 $164,000 Year 2 $326,000 Year 3 $396,000 Year 4 $445,000 The large trucks are expected to cost $890,000 and to have a four-year useful life and a $72,000 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to $14,000. Benson Delivery's management has established a 14 percent desired rate of return. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a.&b. Determine the net present value and present value index for each investment alternative. (Enter answers in whole dollar, not in million. Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answers to 2 decimal places.) 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 $164,000 Year 2 $326,000 Year 3 $396,000 Year 4 $445,000 The large trucks are expected to cost $890,000 and to have a four-year useful life and a $72,000 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to $14,000. Benson Delivery's management has established a 14 percent desired rate of return. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a.&b. Determine the net present value and present value index for each investment alternative. (Enter answers in whole dollar, not in million. Negative amounts should be indicated by a minus sign. Round your intermediate calculations and final answers to 2 decimal places.) Purchase of City Vans Purchase of Trucks a. Net Present Value (NPV) b. Present Value Index (PVI) TABLE 1 PRESENT VALUE OF $1 n 4% 5% 6% 7% 8% 9% 10% 12% 14% 16% 20% 1 0.961538 0.952381 0.943396 0.934579 0.925926 0.917431 0.909091 0.892857 0.877193 0.862069 0.833333 2 0.924556 0.907029 0.889996 0.873439 0.857339 0.841680 0.826446 0.797194 0.769468 0.743163 0.694444 3 0.888996 0.863838 0.839619 0.816298 0.793832 0.772183 0.751315 0.711780 0.674972 0.640658 0.578704 4 0.854804 0.822702 0.792094 0.762895 0.735030 0.708425 0.683013 0.635518 0.592080 0.552291 0.482253 5 0.821927 0.783526 0.747258 0.712986 0.680583 0.649931 0.620921 0.567427 0.519369 0.476113 0.401878 6 0.790315 0.746215 0.704961 0.666342 0.630170 0.596267 0.564474 0.506631 0.455587 0.410442 0.334898 7 0.759918 0.710681 0.665057 0.622750 0.583490 0.5470340.513158 0.452349 0.399637 0.353830 0.279082 8 0.730690 0.6768390.627412 0.582009 0.540269 0.501866 0.466507 0.403883 0.350559 0.305025 0.232568 9 0.702587 0.644609 0.591898 0.543934 0.500249 0.460428 0.424098 0.360610 0.307508 0.262953 0.193807 10 0.675564 0.613913 0.558395 0.508349 0.463193 0.422411 0.385543 0.321973 0.269744 0.226684 0.161506 11 0.649581 0.584679 0.526788 0.475093 0.428883 0.3875330.350494 0.287476 0.236617 0.195417 0.134588 12 0.624597 0.556837 0.496969 0.444012 0.397114 0.355535 0.318631 0.256675 0.2075590.168463 0.112157 13 0.600574 0.530321 0.468839 0.414964 0.367698 0.326179 0.289664 0.229174 0.182069 0.145227 0.093464 14 0.577475 0.505068 0.442301 0.387817 0.340461 0.299246 0.263331 0.204620 0.159710 0.125195 0.077887 15 0.555265 0.481017 0.417265 0.362446 0.315242 0.274538 0.239392 0.182696 0.140096 0.107927 0.064905 16 0.533908 0.458112 0.393646 0.338735 0.291890 0.251870 0.2176290.163122 0.122892 0.093041 0.054088 17 0.513373 0.436297 0.371364 0.316574 0.270269 0.231073 0.197845 0.145644 0.107800 0.080207 0.045073 18 0.493628 0.415521 0.350344 0.295864 0.250249 0.211994 0.179859 0.130040 0.094561 0.069144 0.037561 190.474642 0.395734 0.330513 0.276508 0.231712 0.194490 0.163508 0.116107 0.082948 0.059607 0.031301 20 0.456387 0.376889 0.311805 0.2584190.214548 0.178431 0.148644 0.103667 0.072762 0.051385 0.026084 TABLE 2 PRESENT VALUE OF AN ANNUITY OF $1 n 4% 5% 6% 7% 8% 9% 10% 12% 14% 16% 20% 1 0.961538 0.952381 0.943396 0.934579 0.925926 0.917431 0.909091 0.892857 0.877193 0.862069 0.833333 2 1.886095 1.859410 1.833393 1.808018 1.783265 1.759111 1.735537 1.690051 1.646661 1.605232 1.527778 3 2.775091 2.723248 2.673012 2.624316 2.577097 2.531295 2.486852 2.401831 2.321632 2.245890 2.106481 4 3.629895 3.545951 3.465106 3.387211 3.312127 3.239720 3.169865 3.0373492.913712 2.798181 2.588735 5 4.451822 4.329477 4.212364 4.100197 3.992710 3.889651 3.790787 3.604776 3.433081 3.274294 2.990612 6 5.242137 5.075692 4.917324 4.766540 4.622880 4.4859194.355261 4.111407 3.888668 3.684736 3.325510 7 6.002055 5.786373 5.582381 5.389289 5.206370 5.032953 4.868419 4.563757 4.288305 4.038565 3.604592 6.732745 6.463213 6.209794 5.971299 5.746639 5.534819 5.334926 4.967640 4.638864 4.343591 3.837160 9 7.435332 7107822 6.801692 6.515232 6.246888 5.995247 5.759024 5.328250 4.946372 4.606544 4.030967 8.110896 7.721735 7.360087 7023582 6.710081 6.417658 6.144567 5.650223 5.216116 4.833227 4.192472 8.760477 8.306414 7.886875 7.498674 7.138964 6.805191 6.495061 5.937699 5.452733 5.028644 4.327060 12 9.385074 8.863252 8.383844 7.942686 7.536078 7.160725 6.813692 6.194374 5.660292 5.197107 4.439217 13 9.985648 9.393573 8.852683 8.357651 7.903776 7.486904 7103356 6.423548 5.842362 5.342334 4.532681 14 10.563123 9.898641 9.294984 8.745468 8.244237 7.786150 7.366687 6.628168 6.002072 5.467529 4.610567 15 11.118387 10.379658 9.7122499.107914 8.559479 8.060688 7.606080 6.810864 6.142168 5.575456 4.675473 16 11.652296 10.837770 10.105895 9.4466498.851369 8.312558 7.8237096.973986 6.265060 5.668497 4.729561 17 12.165669 11.274066 10.477260 9.763223 9.121638 8.543631 8.021553 7119630 6.372859 5.748704 4.774634 18 12.659297 11.689587 10.827603 10.059087 9.371887 8.755625 8.201412 7.249670 6.467420 5.817848 4.812195 1913.133939 12.085321 11.158116 10.335595 9.6035998.905115 8.364920 7.365777 6.550369 5.877455 4.843496 20 13.590326 12.462210 11.469921 10.594014 9.818147 9.128546 8.513564 7.469444 6.623131 5.928841 4.869580
