AM Express Inc. is considering the purchase of an additional delivery vehicle for $48,000 on January 1, 20Y1. The truck is expected to have a five-year life with an expected residual value of $7,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $77,000 per year for each of the next five years. A driver will cost $55,000 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 $3,000 per year.

AM Express Inc. is considering the purchase of an additional delivery vehicle for $48,000 on January 1, 20Y1. The truck is expected to have a five-year life with an expected residual value of $7,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $77,000 per year for each of the next five years. A driver will cost $55,000 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 $3,000 per year.

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 8E: Net present value method for a service company Coast-to-Coast Inc. is considering the purchase of an...

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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. a. Determine the expected annual net cash flows from the delivery truck investment for 20Y120Y5. b. Compute the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the present value table appearing in Exhibit 2 of this chapter. c. Is the additional truck a good investment based on your analysis? Explain.
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