Coast-to-Coast Inc. is considering the purchase of an additional delivery vehicle for $70,000 on January 1, 20Y1. 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 $65,000 per year for each of the next five years. A driver will cost $40,000 in 20Y1, with an expected annual salary increase of $2,000 for each year thereafter. The annual operating costs for the truck are estimated to be $6,000 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 20Y1–20Y5. Annual Net Cash Flow 20Y1 20Y2 20Y3 20Y4 20Y5 b. Compute the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the table of the present value of $1 presented above. If 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 Investment Net present value
Coast-to-Coast Inc. is considering the purchase of an additional delivery vehicle for $70,000 on January 1, 20Y1. 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 $65,000 per year for each of the next five years. A driver will cost $40,000 in 20Y1, with an expected annual salary increase of $2,000 for each year thereafter. The annual operating costs for the truck are estimated to be $6,000 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 20Y1–20Y5. Annual Net Cash Flow 20Y1 20Y2 20Y3 20Y4 20Y5 b. Compute the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the table of the present value of $1 presented above. If 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 Investment Net present value
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Coast-to-Coast Inc. is considering the purchase of an additional delivery vehicle for $70,000 on January 1, 20Y1. 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 $65,000 per year for each of the next five years. A driver will cost $40,000 in 20Y1, with an expected annual salary increase of $2,000 for each year thereafter. The annual operating costs for the truck are estimated to be $6,000 per year.
| Present Value of $1 at |
|||||
| 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 20Y1–20Y5.
| Annual Net Cash Flow | |
| 20Y1 | |
| 20Y2 | |
| 20Y3 | |
| 20Y4 | |
| 20Y5 |
b. Compute the net present value of the investment, assuming that the minimum desired
| Present value of annual net cash flows | |
| Investment | |
| Net present value |
c. Is the additional truck a good investment based on your analysis?
No , because the net present value is negative .
Transcribed Image Text:Chapter 26
eBook
Net Present Value Method for a Service Company
Coast-to-Coast Inc. is considering the purchase of an additional delivery vehicle for $70,000 on January 1, 20Y1. 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 $65,000 per year for each of the next five years. A driver will cost $40,000 in 20Y1, with an expected annual salary increase of $2,000 for each year thereafter. The annual operating costs
for the truck are estimated to be $6,000 per year.
Present Value of $1 at Compound Interest
Year
6%
10%
12%
15%
20%
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
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 20Y1-20Y5.
Annual Net Cash Flow
20Υ1
19,000 V
20Υ2
17,000 V
20Υ3
15,000
20Υ4
13,000 V
20Υ5
26,000 v
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Transcribed Image Text:Chapter 26
еВook
7
0.665
0.513
0.452
0.376
0.279
0.627
0.467
0.404
0.327
0.233
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 20Y1-20Y5.
Annual Net Cash Flow
20Υ1
19,000 V
20Υ2
17,000 V
20Y3
15,000 V
20Υ4
13,000 V
20Y5
26,000 V
b. Compute the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the table of the present value of $1 presented above. If 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
Investment
Net present value
c. Is the additional truck a good investment based on your analysis?
, because the net present value is negative v
No v
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