Net Present Value Method for a Service Company

Coast-to-Coast Inc. is considering the purchase of an additional delivery vehicle for $39,000 on January 1, 20Y1. The truck is expected to have a five-year life with an expected residual value of $5,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $65,000 per year for each of the next five years. A driver will cost $46,000 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.

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Net Present ValueUnequal Lives

Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $416,192. The net cash flows estimated for the two proposals are as follows:

	Net Cash Flow
Year	Processing Mill		Electric Shovel
1	$142,000		$178,000
2	126,000		165,000
3	126,000		152,000
4	101,000		156,000
5	77,000
6	64,000
7	55,000
8	55,000

The estimated residual value of the processing mill at the end of Year 4 is $180,000.

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

Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 15%. Use the present value table appearing above.

	Processing Mill	Electric Shovel
Present value of net cash flow total	$fill in the blank 1	$fill in the blank 2
Less amount to be invested	fill in the blank 3	fill in the blank 4
Net present value	$fill in the blank 5	$fill in the blank 6

Which project should be favored?

Electric ShovelProcessing MillNeither because they are equalElectric Shovel

a. Determine the expected annual net cash flows from the delivery truck investment for 20Y1-20Y5.

	Annual Net Cash Flow
20Y1	$fill in the blank 1
20Y2	$fill in the blank 2
20Y3	$fill in the blank 3
20Y4	$fill in the blank 4
20Y5	$fill in the blank 5

b. Compute the net present value of the investment, assuming that the minimum desired rate of return is 10%. Use the table of the present value of $1 presented above. When required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.

Present value of annual net cash flows	$fill in the blank 6
Investment	fill in the blank 7
Net present value	$fill in the blank 8

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

YesNoYes

, because the net present value is

positivenegativepositive

.