Question

Dimas Deliveries Inc. is considering investing $60,000 in a new delivery truck. The truck has no salvage value. The truck is expected to generate an annual net cash flow of $18,000 over its 5-year useful life. The company's hurdle rate for investment is 12%. Compute the net present value (NPV) of this investment opportunity. [For a negative NPV, enter your answer with a negative sign, not parentheses]

Answer 1

The net present value (NPV) of the investment opportunity is -$8,535.96, indicating that investing in the new delivery truck is not favorable.

Step-by-step explanation:

To calculate the net present value (NPV), we need to discount the annual net cash flows generated by the new delivery truck. The formula for calculating NPV is:

NPV = (Net Cash Flow Year 1 / (1 + Hurdle Rate))^1 + (Net Cash Flow Year 2 / (1 + Hurdle Rate))^2 + ... + (Net Cash Flow Year n / (1 + Hurdle Rate))^n - Initial Investment

Using the given information:

• Net Cash Flow = $18,000 per year
• Useful Life = 5 years
• Hurdle Rate = 12%
• Initial Investment = $60,000

Plugging in the values, we can calculate the NPV:

NPV = ($18,000 / (1 + 0.12))^1 + ($18,000 / (1 + 0.12))^2 + ($18,000 / (1 + 0.12))^3 + ($18,000 / (1 + 0.12))^4 + ($18,000 / (1 + 0.12))^5 - $60,000

Simplifying the equation:

NPV = $15,982.14 + $14,264.95 + $12,731.98 + $11,359.27 + $10,125.70 - $60,000

NPV = -$8,535.96

Since the NPV is negative, it means that the investment opportunity is not favorable. Dimas Deliveries Inc. should reconsider investing in the new delivery truck.