Aaron Heath is seeking part-time employment while he attends school. He is consi
ID: 2546939 • Letter: A
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 services company that will offer tutorial services over the Internet. Aaron 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, Aaron expects to pay $20,800 for the equipment. He also expects to pay $2,700 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 $1,200 salvage value and a four year useful life. Aaron 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
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 and whether it should be accepted.
Year of Operation Cash Inflow Cash Outflow 2019 $ 14,200 $ 9,400 2020 18,900 11,900 2021 22,400 13,000 2022 22,400 13,000Explanation / Answer
Answer
The net present value of the investment opportunity.
Net present value = Present Value of Cash inflow - Present Value of Cash outflow
Net present value = 58688.38 - 56119.60
Net present value = 2568.78 Positive NPV
Expected to earn a return is above the cost of capital , it should be accepted.
Year PV factor Cash inflow Present Value of Cash inflow Cash outflow Present Value of Cash outflow 2019 0.8929 14200 12679.18 9400+20800=30200 26965.58 2020 0.7972 18900 15067.08 11900+2700=14600 11639.12 2021 0.7118 22400 15944.32 13000 9253.40 2022 0.6355 22400+1200=23600 14997.80 13000 8261.50 Total 58688.38 56119.60Related Questions
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