Swift 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. Swift Delivery recently acquired approximately $4 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 company's operations manager, believes that the money should be used to expand the fleet of city vans at a cost of $900,000. 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 $325,000 per year. The additional vans are expected to have an average useful life of four years and a combined salvage value of $100,000. Operating the vans will require additional working capital of $50,000, which will be recovered at the end of the fourth year. 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 Year 2 Year 3 Year 4 $175,000 $375,000 $450,000 $500,000 The large trucks are expected to cost $1,000,000 and to have a four-year useful life and a $81,250 salvage value. In addition to the purchase price of the trucks, up-front training costs are expected to amount to $20,000. Swift Delivery's management has established a 10 percent desired rate of return. Page 471 Required Round your computations to two decimal points. 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. SWIFT DELIVERY Cash capital acquired $ 4,000,000 $ $ 900,000 325,000 Alternative 1: Cost of new vans Expected annual cash inflow increase Useful life of new vans Combined salvage value of new vans Additional working capital needed $ $ 100,000 50,000 Alternative 2: Cost of new trucks Reduction in cash outflow-year 1 Reduction in cash outflow-year 2 Reduction in cash outflow-year 3 Reduction in cash outflow-year 4 Useful life of new trucks Salvage value of new trucks Training costs required $ $ $ $ $ 1,000,000 175,000 375,000 450,000 500,000 81,250 20,000 Desired rate of return 10% SWIFT DELIVERY Net Present Value Calculations $ Amount 325,000 100,000 50,000 Alternative 1: Cash Inflows Annual Cash Inflows Salvage Value Working Capital Recovery Total cash inflow Cash outflows Cost of Vans Working Capital Increase Net Present Value Table Value Present Value 3.16987 $1,030,208.00 0.68301 68,301.00 0.68301 3 4, 151.00 1,132,660.00 50 ann $ (900,000.00) (50,000.00 182,660.00 Try again! Alternative 2: Cash Inflows: Year 1 Year 2 Year 3 Year 4 Salvage Value Total cash inflow Cash Outflows Cost of Trucks Training Cost Net Present Value Amount 175,000 375,000 450,000 500,000 81,250 Table Value Present Value 0.90909 $ 159,091.00 0.82645 309,919.00 0.75131 338,090.00 0.68301 341,505.00 0.68301 55,495.00 184, 101.00 1,000,000.00 20,000.00 $ 184, 101.50 Try again! b. Present Value Indexes: Alternative 1 Alternative 2 1.19 1.18 - Correct - Correct