Question

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.

Year 6% 10% 12% 15% 20%
1 0.943 0.909 0.893 0.87 0.833
2 0.89 0.826 0.797 0.756 0.694
3 0.84 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

Required:
Determine the expected annual net cash flows from the delivery truck investment for 20Y1.

Answer 1

Answer:

AM Express Inc.

The expected annual net cash flows from the delivery truck investment for 20Y1 is:

($42,000)

Explanation:

a) Data and Calculations:

Purchase of additional delivery vehicle = $55,000 on Jan. 1, 20Y1

Expected useful life = 5 years

Expected residual value = $15,000

Expected additional revenue = $58,000 per year

Driver's Salary cost = $42,000 in 20Y1

Expected annual salary increase = $1,000

Estimated annual operating costs for the truck = $3,000 per year

                                           Year 1      Year 2     Year 3      Year 4     Year 5

Cash inflow                      $58,000  $58,000  $58,000  $58,000  $58,000

Cash outflows:

Delivery vehicle             $55,000        0                0            0              0

Driver's salary                  42,000     42,000    43,000    44,000     45,000

Annual increment                                1,000       1,000       1,000        1,000

Operating costs                 3,000       3,000      3,000      3,000        3,000

Total outflow                $100,000   $46,000  $47,000 $48,000   $49,000

Expected annual net cash flows for 20Y1:

Cash Inflow        $58,000

Cash outflow     (100,000)

Net cash flows ($42,000)