Marsha Jones has bought a used Mercedes horse transporter for her Connecticut es
ID: 2735742 • Letter: M
Question
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $45,000. The object is to save on horse transporter rentals.
Marsha had been renting a transporter every other week for $210 per day plus $1.50 per mile. Most of the trips are 90 miles in total. Marsha usually gives the driver a $40 tip. With the new transporter she will only have to pay for diesel fuel and maintenance, at about $0.55 per mile. Insurance costs for Marsha’s transporter are $1,700 per year.
The transporter will probably be worth $25,000 (in real terms) after eight years, when Marsha’s horse Nike will be ready to retire. Assume a nominal discount rate of 8% and a 4% forecasted inflation rate. Marsha’s transporter is a personal outlay, not a business or financial investment, so taxes can be ignored.
Calculate the NPV of the investment. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Marsha had been renting a transporter every other week for $210 per day plus $1.50 per mile. Most of the trips are 90 miles in total. Marsha usually gives the driver a $40 tip. With the new transporter she will only have to pay for diesel fuel and maintenance, at about $0.55 per mile. Insurance costs for Marsha’s transporter are $1,700 per year.
The transporter will probably be worth $25,000 (in real terms) after eight years, when Marsha’s horse Nike will be ready to retire. Assume a nominal discount rate of 8% and a 4% forecasted inflation rate. Marsha’s transporter is a personal outlay, not a business or financial investment, so taxes can be ignored.
Hint: All numbers given in the question are in real term.Explanation / Answer
Answer: The table below shows the real cash flows. The NPV is computed using the real rate, which is computed as follows:
(1 + rnominal) = (1 + rreal) × (1 + inflation rate)
1.08 = (1 + rreal) × (1.04)
rreal = 0.0385= 3.85%
*Note that savings come from the transporter rental, mileage cost and tips (all multiplied by 26 times which is the amount of trips done each year).
Year 0 1 2 3 4 5 6 7 8 Investment -45000 25000 Savings 10010 10010 10010 10010 10010 10010 10010 10010 Insurance -1700 -1700 -1700 -1700 -1700 -1700 -1700 -1700 Fuel -1287 -1287 -1287 -1287 -1287 -1287 -1287 -1287 Net cash Flow -45000 7023 7023 7023 7023 7023 7023 7023 32023 Discount factor 1 0.96293 0.92723 0.89285 0.85975 0.82788 0.79719 0.76763 0.73918 DCF -45000.00 6762.64 6511.93 6270.51 6038.05 5814.20 5598.65 5391.10 23670.64 NPV 21057.73Related Questions
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