Brett Dunlop is seeking part-time employment while he attends school. He is cons

Question

Brett Dunlop is seeking part-time employment while he attends school. He is considering purchasing technical equipment that will enable him to start a small training services company that will offer tutorial services over the Internet. Brett expects demand for the service to grow rapidly in the first two years of operation as customers learn about the availability of the Internet assistance. Thereafter, he expects demand to stabilize. The following table presents the expected cash flows.

     In addition to these cash flows, Mr. Dunlop expects to pay $21,600 for the equipment. He also expects to pay $3,000 for a major overhaul and updating of the equipment at the end of the second year of operation. The equipment is expected to have a $1,400 salvage value and a four year useful life. Mr. Dunlop desires to earn a rate of return of 9 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Calculate the net present value of the investment opportunity. (Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places.)

Indicate whether the investment opportunity is expected to earn a return that is above or below the desired rate of return.

Brett Dunlop is seeking part-time employment while he attends school. He is considering purchasing technical equipment that will enable him to start a small training services company that will offer tutorial services over the Internet. Brett expects demand for the service to grow rapidly in the first two years of operation as customers learn about the availability of the Internet assistance. Thereafter, he expects demand to stabilize. The following table presents the expected cash flows.

Explanation / Answer

a) Statement showing Cash flows Particulars Time PVf@9% Amount PV Cash Outflows (Equipment Purchase)                       -                        1.00                         (21,600.00)                         (21,600.00) Cash Outflows (Major Overheaul))                       -                        1.00                           (3,000.00)                           (3,000.00) PV of Cash outflows                         (24,600.00) Net Cash inflows                   1.00                 0.9174                              5,200.00                              4,770.64 Net Cash inflows                   2.00                 0.8417                              8,400.00                              7,070.11 Net Cash inflows                   3.00                 0.7722                              9,600.00                              7,412.96 Net Cash inflows                   4.00                 0.7084                              9,600.00                              6,800.88 Net Cash inflows =Salvage Value                   4.00                 0.7084                              1,400.00                                 991.80 PV of Cash Inflows                           27,046.39 NPV                              2,446.39 b-1 return would be gretaer than desired return since NPV is positive b-2 Accepted

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.