a.
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
To determine: The net cash flow of AME Incorporation.
b.
To calculate: The net present value of the investment.
c.
To analysis: The investment in additional truck based on net present value.
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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.arrow_forwardGardner Denver Company is considering the purchase of a new piece of factory equipment that will cost $420,000 and will generate $95,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further Instructions on internal rate of return in Excel, see Appendix C.arrow_forwardCaduceus Company is considering the purchase of a new piece of factory equipment that will cost $565,000 and will generate $135,000 per year for 5 years. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return In Excel, see Appendix C.arrow_forward
- Consolidated Aluminum is considering the purchase of a new machine that will cost $308,000 and provide the following cash flows over the next five years: $88,000, 92,000, $91,000, $72,000, and $71,000. Calculate the IRR for this piece of equipment. For further instructions on internal rate of return in Excel, see Appendix C.arrow_forwardAverage rate of returncost savings Maui Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of 125,000 with a 15,000 residual value and an eight-year life. The equipment will replace one employee who has an average wage of 28,000 per year. In addition, the equipment will have operating and energy costs of 5,150 per year. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment.arrow_forwardNet Present Value Talmage Inc. has just completed development of a new printer. The new product is expected to produce annual revenues of 2,700,000. Producing the printer requires an investment in new equipment costing 2,880,000. The printer has a projected life cycle of 5 years. After 5 years, the equipment can be sold for 360,000. Working capital is also expected to increase by 360,000, which Talmage will recover by the end of the new products life cycle. Annual cash operating expenses are estimated at 1,620,000. The required rate of return is 8%. Required: Prepare a schedule of the projected annual cash flows. Calculate the NPV using only discount factors from Exhibit 12B.1 (p. 670). Calculate the NPV using discount factors from both Exhibits 12B.1 and 12B.2 (p. 671).arrow_forward
- Net Present Value Method for a Service Company Coast-to-Coast Inc. is considering the purchase of an additional delivery vehicle for $35,000 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 $56,000 per year for each of the next five years. A driver will cost $40,000 in 20Y1, with an expected annual salary increase of $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…arrow_forwardNet Present Value Method for a Service Company AM Express Inc. is considering the purchase of an additional delivery vehicle for $50,000 on January 1, 20Y1. The truck is expected to have a 5-year life with an expected residual value of $7,000 at the end of 5 years. The expected additional revenues from the added delivery capacity are anticipated to be $57,000 per year for each of the next 5 years. A driver will cost $39,000 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 0.247…arrow_forwardNet 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% 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…arrow_forward
- AM Express Inc. is considering the purchase of an additional delivery vehicle for $43,000 on January 1, 20Y1. The truck is expected to have a 5-year life with an expected residual value of $7,000 at the end of 5 years. The expected additional revenues from the added delivery capacity are anticipated to be $59,000 per year for each of the next 5 years. A driver will cost $42,000 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 0.247 0.162 a.  Determine the expected annual net…arrow_forwardNet Present Value Method for a Service Company Coast-to-Coast Inc. is considering the purchase of an additional delivery vehicle for $46,000 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 $61,000 per year for each of the next five years. A driver will cost $41,000 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 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 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 0.432 0.335 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…arrow_forwardA utility company is considering the following plans to provide certain service required by the present demand and the perspective growth of demand for the coming 18 yearsPlan R required immediate investment of P500,000 in property that has an estimated life of 18 years and with 20% terminal salvage value. Annual disbursements for operation and maintenance will be P50,000. Annual property taxes will be 2% of first cost.Plan S requires an immediate investment of P300,000 in property that has an estimated life of 18 years with 20% terminal salvage value. Annual disbursements for the operation and maintenance during the first 6 years will be P40,000. After 6 years, an additional investment of P400,000 will be required in property having an estimated life of 12 years with 40% terminal salvage value. After this additional property is installed, annual disbursement for operation and maintenance of the combined property will be P60,000. Annual property taxes will be 2% of the first cost of…arrow_forward
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