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Question: On Time Delivery Inc. is considering the purchase of an additional delivery truck for $85,000 on January 1, 20Y4. The truck is expected to have a five-year life with an expected residual value of $8,000 at the end of five years. The expected additional revenues from the added delivery capacity are anticipated to be $70,000 per year for each of the next five years. A driver will cost $25,000 in 20Y4, with an expected annual salary increase of $1,000 for each year thereafter. The operating costs for the truck is estimated to cost $9,000 per year.
a. Determine the expected annual net cash flows from the delivery truck investment for 20Y4-20Y8.
b. Calculate the net present value of the investment, assuming that the minimum desired rate of return is 12%.
c. Is the additional truck a good investment based on your analysis?
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