Net Present Value Method

TopNotch Delivery Inc. is considering the purchase of an additional delivery truck for $35,000 on January 1, 20Y4. 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 $53,000 per year for each of the next five years. A driver will cost $37,000 in 20Y4, with an expected annual salary increase of $3,000 for each year thereafter. The operating costs for the truck are estimated to be $2,000 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 20Y420Y8. If required, use the minus sign to indicate an overall negative annual net cash outflow.

	Annual Net Cash Flow
20Y4	$fill in the blank 1
20Y5	fill in the blank 2
20Y6	fill in the blank 3
20Y7	fill in the blank 4
20Y8	fill in the blank 5

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

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

c. Which of the following statements regarding the additional truck investment is true?

1. The total present value of cash flows from the delivery truck investment is less than the total purchase price of the truck.
2. The total present value of cash flows from the delivery truck investment is greater than the total purchase price of the truck.
3. The total present value of cash flows from the delivery truck investment is equal to the total purchase price of the truck.
4. The annual net cash flows from 20Y4 to 20Y8 are all less than $11,000.

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