Apnea Video Rental Store is considering the purchase of an almost new minivan to

Question

 Apnea Video Rental Store is considering the purchase of an almost new minivan to deliver and pick up video tapes from customers. The minivan will cost $45,000 and is expected to last 8 years. However, the minivan's engine will need to be overhauled at a cost of $4,000 at the end of year 3. In addition, purchasing the minivan would require an immediate investment of $20,000 in working capital which would be released for investment elsewhere at the end of the 8 years. The minivan is expected to have a $10,000 salvage value at the end of 8 years. This delivery service is expected to generate net cash inflows of $20,000 per year in each of the 8 years. Apnea's cost of capital is 15%. 

 Calculate the net present value (NPV) of this investment opportunity. Do not use decimals in your answer. 

 Use the time value of money factors posted on carmen to answer this question. To access these factors, click on content and then scroll to the bottom and click on the link labeled present & future value table factors. No credit wil be awarded for this question using a means other than these table factors to answer this question. 

Explanation / Answer

The NPV of the investment opportunity at the required rate of return of 15% is $ 31,918.

Workings:

$ Present value of annual cash inflows ( $ 20,000 x 4.487) 89,740 Present value of salvage value and working caiptal released($ 30,000 x 0.327) 9,810 Present value of the investment plus working capital( $ 65,000 x 1) (65,000) Present value of overhaul costs ( $ 4,000 x 0.658) (2,632) NPV 31,918

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

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