Question

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.

Answer 1

Answer:

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