Aaron health is seeking part-time employment while he attends school. He is cosi
ID: 2597779 • Letter: A
Question
Aaron health is seeking part-time employment while he attends school. He is cosidering purchasing technical equipment that will enable him to star a small training services company that will offer tutorial sevices over the internet. Aaron expects demand for the service to trow rapidly in the first two years of operation as customers learn abut the availability of the internet assistance. Thereafter, the expects demand to stabilize. The expected cash flows:
Year of operation cash inflow cash outflow
In addition to these cash flows. Aaron expects to pay $20200 for the equipment. He also expects to pay $ 3500 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 $2000 salvage value and a four year useful life. Aaron desires to earn a rate of return of 10 percent(PV of $ 1 )
a) calculate the net present value of the investment opportunity ( negative amount should be indicated by a minus sign. Round intermediate calculations ana final answer to 2 decimal places.)
b) Indicate whehter 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.
2019 13300 8300 2020 19800 11500 2021 22600 13100 2022 22600 13100Explanation / Answer
Year 0 1 2 3 4 NPV Capital flow -20,200 -3,500 2,000 Cash inflow 13,300 19,800 22,600 22,600 Cash Outflow 8,300 11,500 13,100 13,100 Net Cash flow -20,200 5,000 4,800 9,500 11,500 Discount rate 1 0.9090909 0.8264463 0.7513148 0.6830135 Disc. Cash flow -20,200 4,545 3,967 7,137 7,855 3,305 Assumed no tax (b) since NPV is >0 So it is expected it will earn above the desired rate
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