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 $20,500 for the equipment. He also expects to pay $2,800 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 12 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.

Year of Operation Cash Inflow Cash Outflow 2015 $ 12,800 $ 8,200 2016 19,700 11,600 2017 21,000 13,300 2018 21,000 13,300

     In addition to these cash flows, Mr. Dunlop expects to pay $20,500 for the equipment. He also expects to pay $2,800 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 12 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Required a.

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.)

b-1.

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

Above Below

b-2. Based on your answer in Requirement b-1, should the investment opportunity be accepted. Accepted Rejected

Explanation / Answer

Net present value = {Net Period Cash Flow/(1+R)^T} - Initial Investment

Net present cash flows

55,426

Discounted cash outflows

34,488

Equipment 20,500

updation of equipmrnt (2800*.7972) 2,232

Less : salvage ( 1400 * .6355) 890

56,330

NPV = 55426 - 56330 = -904

NPV is negitive

B1 Below

B2 Rejected

Year of Operation Cash Inflow Discounted cashinflow 2015 12,800 $ 11,429 2016 19,700 15,705 2017 21,000 14,946 2018 21,000 13,346

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---

---

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