Brett Dunlop is seeking part-time employment while he attends school. He is cons
ID: 2497132 • Letter: B
Question
Brett Dunlop 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. Brett 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, Mr. Dunlop expects to pay $21,000 for the equipment. He also expects to pay $3,600 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 $1,500 salvage value and a fouryear useful life. Mr. Dunlop desires to earn a rate of return of 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Calculate the net present value of the investment opportunity. (Round intermediate calculations and final answer to 2 decimal places.)
Year of Operation Cash Inflow Cash Outflow 2015 $ 16,000 $ 10,000 2016 20,000 12,000 2017 21,000 12,600 2018 21,000 12,600Explanation / Answer
Statemnet showing Cash flows Particulars Time PVf@8% Amount PV Cash Outflows (Purchase) - 1.00 (21,000.00) (21,000.00) Cash Outflows (Major Overhaul) 2.00 0.857339 (3,600.00) (3,086.42) PV of Cash outflows (24,086.42) Net Cash inflows (16000-10000) 1.00 0.925926 6,000.00 5,555.56 Net Cash inflows (20,000-12,000) 2.00 0.857339 8,000.00 6,858.71 Net Cash inflows (21,000-12,600) 3.00 0.793832 8,400.00 6,668.19 Net Cash inflows (21,000-12,600) 4.00 0.735030 8,400.00 6,174.25 Cash inflows (Salvage Value) 4.00 0.735030 1,500.00 1,102.55 PV of Cash Inflows 26,359.25 NPV 2,272.83