Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883



Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Net present value method

On Time Delivery Inc. is considering the purchase of an additional delivery truck for $85,000on January 1, 20Y4. The truck is expected to have a five-year life with an expected residualvalue of $8,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $70,000 per year for each of the next five years. A driverwill cost $25,000 in 20Y4, with an expected annual salary increase of $1,000 for each yearthereafter. The operating costs for the truck is estimated to cost $9,000 per year.

a. Determine the expected annual net cash flows from the delivery truck investment for20Y4—20Y8.

b. Calculate the net present value of the investment, assuming that the minimum desired rateof return is 12%. Use the present value of $1 table appearing in Exhibit 2 of this chapter.

c. Is the additional truck a good investment based on your analysis?

To determine


Concept Introduction:

Cash flow statement is a very important part of the financial statement of all company. Cash flow balance always equal to net cash as like cash received in the business minus cash paid during the year i.e. the difference between the cash inflow and the cash outflow.

To Find out:

Expected annual net cash flows for OTD Inc.


Computation of Expected annual net cash flows:

              OTD Inc.

       Statement for calculation of cash inflow of each year ($)

    Particulars   20Y4  20Y5  20Y6  20Y7  20Y8
    Revenue(a)  70,000  70,000  70,000  70,000  70,000
    Driver's salary (b)  25,000  26,000  27,000

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