The Fishers Ambulance Paramedics want to purchase a new ambulance that will last

Question

The Fishers Ambulance Paramedics want to purchase a new ambulance that will last for five years for $60,000, and have been offered a discount rate of 6%. The paramedics would like to pay for the acquisition and maintenance of the ambulance partially from donations and partially from town receipts. The local town has agreed to reimburse Fishers $50 for each run it makes using the new ambulance; they expect to make 200 trips per year with the ambulance. Vehicle maintenance will cost $1,000 per year. How much will the squad need in donations to its capital fund this year to make the purchase a break-even proposition? (Consider the net present value of the costs of buying and operating the ambulance over its lifetime, less the payments that will be received from the town. Are the payments that will be received from the town sufficient? If not, how much must be raised in donations before the ambulance can/should be purchased?)

Explanation / Answer

Year0 1 2 3 4 5 cost of Ambulance (60,000) Less: discount        3,600 Net cost (56,400) Reimburse    10,000    10,000    10,000    10,000    10,000 maintenance cost    (1,000)    (1,000)    (1,000)    (1,000)    (1,000) net reimbursement      9,000      9,000      9,000      9,000      9,000 dis factor - 6% 0.94339 0.88999 0.83961 0.79209 0.74725 PV of cashflow (56,400) 8490.51 8009.91 7556.49 7128.81 6725.25 NPV - (18,489) (need this amount in capital fund)

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