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Hernandez Delivery is a small company that transports business packages between New York and Chicago. It operates a feet of small vans that moves packages
Hernandez Delivery is a small company that transports business packages between New York and Chicago. It operates a feet 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. Hernandez recently acquired approximatly $6 million of cash capital from its owners, and its president, K Hernandez, is trying to identify the most profitable way to invest these funds. Ch R Smith the company's operations manager, believes that the money should be used to expand the fleet of city vans at a cost of company to expand its services into new markets, thereby increasing the revenue base. More specifically, he expects cash inflows to increase by expected to have an average useful life of four years and a combined salvage value of Operating the vans will require additional working capital of S 3,240,000 He argues that more vans would enable the 1,260,000 per year. The additional vans are $ 22,222 $180,000 which will be recovered at the end of the fourth year In contrast G Costanza, 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 with reductions in cash outflows as the following. Year 1 Year 2 Year 3 792,000 1,584,000 1,980,000 2,178,000 The large trucks are expected to cost year useful life and a In addition to the purchase price of the trucks, up-front training costs are expected to amount to Henandez Deliverys management has established a S 3,600,000 and have a $360,000 salvage value $ 100,000 10% desired rate of return. REQUIRED lgnore Depreciation and Tax as they are imbedded in the cash inflow and cash outflow data a. Determine the net present value of the two investment alternatives. b. Calculate the present value index for each alternative. c. Indicate which investment alternative you would recommend. Explain your choice. Advisable to set up a mini table of present value factors to make your calculations easier
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