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

The expected annual net cash flows from the delivery truck investment for 20Y1 would be $12,000.

Step-by-step explanation:

To determine the expected annual net cash flows from the delivery truck investment for 20Y1, we need to calculate the annual revenues and subtract the annual expenses.

The additaonal revenues from the added delivery capacity are $58,000 per year for each of the next five years.

Therefore, the total annual revenues would be $58,000.

The annual operating costs for the truck are estimated to be $3,000 per year.

The driver's cost in 20Y1 is $42,000, with an expected annual salary increase of $1,000 for each year thereafter.

Therefore, the total annual expenses would be $3,000 + $42,000 + $1,000 = $46,000.

To determine the expected annual net cash flows, we subtract the total annual expenses from the total annual revenues.

Therefore, the expected annual net cash flows for 20Y1 would be $58,000 - $46,000 = $12,000.