Bundle: Managerial Accounting, Loose-leaf Version, 14th - Book Only
14th Edition
ISBN: 9781337541398
Author: Carl Warren; James M. Reeve; Jonathan Duchac
Publisher: Cengage Learning
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Chapter 11, Problem 8E
(a)
To determine
Cash flow:
Cash flow is the monetary consideration (return or income) received by the business for its long-term capital investment.
Net present value method is the method which is used to compare the initial
The net cash flow of AME Incorporation.
(b)
To determine
To calculate: The net present value of the investment.
(c)
To determine
To analysis: The investment in additional truck based on net present value.
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Net Present Value Method for a Service Company
AM Express Inc. is considering the purchase of an additional delivery vehicle for $49,000 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 $78,000 per year for each of the next five years. A driver will cost $56,000 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.
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…
a. Determine the expected annual net cash flows from the delivery truck investment for 20Y1-20Y5.
Annual Net Cash Flow
20Y1
20Υ2
20Υ3
$
20Υ4
20Υ5
$
b. Calculate 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 flow
X
Less investment
$ -49,000 V
Net present value
X
Net Present Value Method for a Service Company
AM Express 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 $6,000 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 $36,000 in 20Y1, with an expected annual salary increase of $3,000 for each year thereafter. The annual 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…
Chapter 11 Solutions
Bundle: Managerial Accounting, Loose-leaf Version, 14th - Book Only
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