Aaron Heath is seeking part-time employment while he attends school. He is consi

Question

Aaron Heath is seeking part-time employment while he attends school. He is considering purchasing technical equipment that will enable him to start a small training s company that will offer tutorial services over the Internet Aaron expects demand for the to grow rapidly in the first two years of oper ation as customers learn about the availability of he expects demand to stabilize. The following table presents the expected cash flows 2019 2820 2021 2822 21,480 21,400 12,980 12,900 In addition to these cash flows, Aaron expects to pay $21,900 for the equipment. He also expects to pay $2,900 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 $1300 salvage value and a four year useful life Aaron desires to earn a rate of return of 12 percent EV of S1 and PVA of $1 (Use appropriate factor(s) from the tobles provided.) Required a. Calculate the net present value of the investment opportunity (Negetive amount should be indicated by a minus sign. Round intermediate colculetions and final answer to 2 decimal places.) opportunity is expected to earn a return that is above or below the desired rate of return and whether it should be accepted a. Net lected

Explanation / Answer

b. Return will be below the cost of capital.

c. Investment opportunity should be Rejected as net present value is negative.

Inflow Outflow Additional Salvage Net Cashflow Present Value (A) (B) outflow (C ) (D) (A-B-C+D) 1$ at 12% 14200 9000 5200 0.89 4643 19300 11300 2900 5100 0.8 4080 21400 12900 8500 0.71 6035 22700 12900 1300 9800 0.64 6272 Total 21029.86 Initial Investment 21900 Net Present value. -870.143

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