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1 September, 00:46

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.

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

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  1. 1 September, 00:52
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    First year: 19,000

    Second year: 17,000

    Third year: 15,000

    Forth year: 13,000

    Fifth year: 30,000

    Explanation:

    We need to subtract from the expected revenue the expected cost for Cash revenue 65,000

    Driver Cost: (40,000)

    Operating cost: (6,000)

    Net cash flow: 19,000

    This value stand for the first year

    Then this will decrease by 2,000 each year as the driver wages increase over time.

    Second year: 19,000 - 2,000 = 17,000

    Third year: 17,000 - 2,000 = 15,000

    Forth year: 15,000 - 2,000 = 13,000

    In the last year we must also include the residual value of the equipment:

    Fifth year: 13,000 - 2.000 + 15,000 = 30,000
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