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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 $55,000 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 $58,000 per year for each of the next five years. A driver will cost $42,000 in 20Y1, with an expected annual salary increase of $1,000 for each year thereafter. The annual operating costs for the truck are estimated to be $3,000 per year. a. Determine the expected annual net cash flows from the delivery truck investment for 20Y1-20Y5. b. Calculate the net present value of the investment, assuming that the minimum desired rate of 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? Explain.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 26, Problem 26.8EX
Textbook Problem

Net present value method for a service company

AM Express Inc. is considering the purchase of an additional delivery vehicle for $55,000 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 $58,000 per year for each of the next five years. A driver will cost $42,000 in 20Y1, with an expected annual salary increase of $1,000 for each year thereafter. The annual operating costs for the truck are estimated to be $3,000 per year.

  1. a. Determine the expected annual net cash flows from the delivery truck investment for 20Y1-20Y5.
  2. b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%. Use the present value of $1 table appearing in Exhibit 2 of this chapter.
  3. c. Is the additional truck a good investment based on your analysis? Explain.

Expert Solution

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:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

To determine: The net cash flow of AME Incorporation.

Explanation of Solution

In this case, the annual revenues and expenses of the AME Incorporation are same in all useful life of asset...

Expert Solution

b.

To determine

To calculate: The net present value of the investment.

Expert Solution

c.

To determine

To analysis: The investment in additional truck based on net present value.

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Chapter 26 Solutions

Accounting
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