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Net Present Value Method

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.

Present Value of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	0.890	0.826	0.797	0.756	0.694
3	0.840	0.751	0.712	0.658	0.579
4	0.792	0.683	0.636	0.572	0.482
5	0.747	0.621	0.567	0.497	0.402
6	0.705	0.564	0.507	0.432	0.335
7	0.665	0.513	0.452	0.376	0.279
8	0.627	0.467	0.404	0.327	0.233
9	0.592	0.424	0.361	0.284	0.194
10	0.558	0.386	0.322	0.247	0.162

a. Determine the expected annual net cash flows from the delivery truck investment for 20142018.

	Annual Net Cash Flow
2014	$
2015	$
2016	$
2017	$
2018	$

b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%. (If required, round to the nearest dollar.) Use the table of the present value of $1 presented above. If required, use the minus sign to indicate a negative net present value.

Present value of annual net cash flow	$
Less investment	$
Net present value	$

c. Is the additional truck a good investment based on your analysis? SelectYesNoItem 9

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a. For each year, subtract the driver salaries and operating costs from the revenues. For 2018 only, add the residual value.

b. Multiply the present value of $1 factor for each year (Exhibit 1) by that year's net cash flow (from a). Subtract the amount to be invested from the total present value of the net cash flow.

c. Which is more favorablea positive net present value or a negative net present value?