Fast Delivery Company
Fast Delivery is a small company that transports busines
Fast Delivery Company
Fast Delivery is a small company that transports business
packages betweenNew York andChicago. It operates a fleet of small vans
that moves packages to and from a central depot within each city and uses a
common carrier to deliver the packages between the depots in the two cities.
Fast Delivery recently acquired approximately $6million of cash capital from it
owners, and its president Don, is trying to identify the most profitable way to
invest these funds.
One manager believes that the money should be used to expand the fleet of city
vans at a cost of $720.000. He argues that more vans would enable the company
to expand its services into new markets, thereby increasing the revenue base.
More specifically he expects cash inflow to increase by $280.00 per year. The
additional vans are expected to have an average useful life of four years and a
combined salvage value of $100,000. Operating the vans will require additional
working capital of $40,000 which will be recovered at the end of the fourth
year.
In contrast, the company chief
accountant, believes that the funds should be used to purchased large trucks to
deliver the package between the depots in the two cities. The conversion
process would produce continuing improvement in operating savings with
reductions in cash outflow as the following.
Year 1 $160,000
Year 2 $320,000
Year 3 $400,000
Year 4 $440,000
The large trucks are expected to cost $800,000 and to have a
four-year useful life and a $80,000 salvage value. In additional to the
purchase price of the trucks, up-front training cost are expected to amount to
$16,000. Fast Deliverys management has established a 16 percent desired rate
of return.
Required
A. Determine
the net present value of the two investment alternatives.
B. Calculate
the present value index for each alternative.
C. Indicate which investment alternative you
would recommend. Explain the choice.
Fast Delivery CompanyFast Delivery is a small company that transports business
packages betweenNew York andChicago. It operates a fleet of small vans
that moves packages to and from a central depot within each city and uses a
common carrier to deliver the packages between the depots in the two cities.
Fast Delivery recently acquired approximately $6million of cash capital from it
owners, and its president Don, is trying to identify the most profitable way to
invest these funds.
One manager believes that the money should be used to expand the fleet of city
vans at a cost of $720.000. He argues that more vans would enable the company
to expand its services into new markets, thereby increasing the revenue base.
More specifically he expects cash inflow to increase by $280.00 per year. The
additional vans are expected to have an average useful life of four years and a
combined salvage value of $100,000. Operating the vans will require additional
working capital of $40,000 which will be recovered at the end of the fourth
year.
In contrast, the company chief
accountant, believes that the funds should be used to purchased large trucks to
deliver the package between the depots in the two cities. The conversion
process would produce continuing improvement in operating savings with
reductions in cash outflow as the following.Year 1 $160,000Year 2 $320,000Year 3 $400,000Year 4 $440,000The large trucks are expected to cost $800,000 and to have a
four-year useful life and a $80,000 salvage value. In additional to the
purchase price of the trucks, up-front training cost are expected to amount to
$16,000. Fast Deliverys management has established a 16 percent desired rate
of return.
RequiredA. Determine
the net present value of the two investment alternatives.B. Calculate
the present value index for each alternative.C. Indicate which investment alternative you
would recommend. Explain the choice.
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