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.

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)

c.

clarify customers’ doubts only when asked.