Case Study 8: Mealkit4U - Net Present Value (VPV)

MealKit4U require a fleet of refrigerated vans to deliver meal kits to customers in particular
geographical regions. Managers have two alternatives: diesel vans or electric vans. They consult
experts and obtain estimates of cash flows associated with each option. Note that the managers are
only concerned with the difference between the two options. Cashflows that are the same, whether
electric vans are selected or diesel vans are selected, are not relevant, and should not be included.

The cash inflows and cash outflows over 5 years are shown in Table 1 for the electric vehicle option
and in Table 2 for the diesel vehicle option. We are assuming that the vans will be replaced after 5
years.

Since the venture in question is the acquisition of vans to be used for deliveries, the only cash inflow
is the notional amount that MealKit4U would receive if they sold the vans at the end of the analysis
period. We are assuming that the benefit derived by MealKit4U from the use of the vans is the same
no matter which option they choose, so it is not relevant for the purpose of selecting one option
over the other. We therefore focus on the cost.

Table 1

Estimated cash flows for the acquisition, operation, and disposal of delivery van
Now End
Total Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Option A: Electrical Vehicle (per van)

Cash inflows
disposal of vehicle 44,000 44,000
Cash outflows
acquisition of vehicle (90,000) (90,000)
electricity (18,615) (3,723) (3,723) (3,723) (3,723) (3,723)
insurance (9,000) (1,800) (1,800) (1,800) (1,800) (1,800)
registration (3,300) (500) (700) (700) (700) (700)
repairs and maintenance (22,500) (4,500) (4,500) (4,500) (4,500) (4,500)
net cash flow (99,415) (90,000) (10,523) (10,723) (10,723) (10,723) 33,277

Table 1 shows the estimates of the cash required to purchase an electric van, operate it for 5 years,
and sell it at the end of the five years. The required cash flows amount to approximately $99,415.

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Table 2

Estimated cash flows for the acquisition, operation, and disposal of delivery van
Now End
Total Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Option B: Diesel Vehicle (per van)

Cash inflows
disposal of vehicle 30,000
Cash outflows
acquisition of vehicle (60,000)
diesel (11,073) (11,396) (11,826) (12,364) (12,901)
insurance (1,200) (1,200) (1,200) (1,200) (1,200)
registration (998) (950) (950) (950) (950)
repairs and maintenance (3,000) (3,000) (3,000) (3,000) (3,000)

Task 1

a) Use the estimated cashflows in Table 2 to calculate the cash required to

purchase, operate, and dispose of, a diesel van.
b) Compare the result with that for an electric van. Which option requires
less cash?

Our analysis at this stage does not account for the time-value of money.

The Net Present Value (NPV) of the estimated cash flows is the sum of the discounted cashflows for
each of the five years. Table 3 indicates that the NPV of the cash flows for the electric vehicle option
is negative $103,895.

Estimated cash flows for the acquisition, operation, and disposal of delivery van
Now End
Total Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Option A: Electrical Vehicle (per van)

net cash flow (99,415) (90,000) (10,523) (10,723) (10,723) (10,723) 33,277
discount factor 15% 1.000 0.870 0.756 0.658 0.572 0.497
discounted net cash flow (NPV) (103,895) (90,000) (9,150) (8,108) (7,051) (6,131) 16,545

Exhibit 1

This is significantly more negative than the sum of the undiscounted cash flows, mainly because the
present value of the $44,000 inflow on disposal of the vehicle at the end of 5 years is discounted
back to only $21,876.

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The negative NPV implies that for MealKit4U, paying $103,895 now, is equivalent to paying the
undiscounted cash flows over the next 5 years as shown in Table 1.

Task 2:

a) Use the estimated cashflows in Table 2 to calculate the NPV of the cash
flows required to acquire, operate, and dispose of, a diesel van.
b) Compare the result with that for an electric van. Which option has the
more favourable NPV?
c) Should Mealkit4U consider the time-value of money when deciding
whether to acquire electric vans or diesel vans?

Task 3:

Suppose the estimated cost of electricity is 25% higher that shown in Table 1.

1. What affect would this have on our NPV analysis?

2. Would it influence MealKit4U’s decision?

Task 4:
Suppose the estimated cost of maintaining an electric vehicles is 30% higher
than depicted in Table 1. What affect would this have on our NPV analysis?
Would it influence MealKit4U’s decision?

Task 5:
Suppose MealKit4U’s senior managers prescribed a discount rate of 10% rather
than 15%. What affect would this have on our NPV analysis? Would it influence
MealKit4U’s decision?

END last reviewed: 19 April 2022