Exercise 10-6A (Algo) Determining net present value LO 10-2 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: Year of Operation. Year 1 Year 2 Year 3 Year 4 Cash Inflow Cash Outflow $20,500 $42,000 46,000 24,500 49,000 26,500 49,000 26,500 In addition to these cash flows, Aaron expects to pay $33,500 for the equipment. He also expects to pay $7,400 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 $5,700 salvage value and a four-year useful life. Aaron desires to earn a rate of return of 5 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Calculate the net present value of the investment opportunity. Note: Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places. b. Indicate whether the investment opportunity is expected to earn return that is above or below the desired rate of return and whether it should be accepted. a. Net present value b. Will the return be above or below the cost of capital? b. Should the investment opportunity be accepted? $ 35,200.00

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
icon
Related questions
Question

Dinabhai

Exercise 10-6A (Algo) Determining net present value LO 10-2
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:
Year of
Operation
Year 1
Year 2
Year 3
Year 4
Cash Inflow Cash Outflow
$42,000
$20,500
46,000
24,500
49,000
49,000
26,500
26,500
In addition to these cash flows, Aaron expects to pay $33,500 for the equipment. He also expects to pay $7,400 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 $5,700 salvage value
and a four-year useful life. Aaron desires to earn a rate of return of 5 percent. (PV of $1 and PVA of $1)
Note: Use appropriate factor(s) from the tables provided.
Required
a. Calculate the net present value of the investment opportunity.
Note: Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal
places.
b. 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.
a. Net present value
b. Will the return be above or below the cost of capital?
b. Should the investment opportunity be accepted?
$
35,200.00
Transcribed Image Text:Exercise 10-6A (Algo) Determining net present value LO 10-2 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: Year of Operation Year 1 Year 2 Year 3 Year 4 Cash Inflow Cash Outflow $42,000 $20,500 46,000 24,500 49,000 49,000 26,500 26,500 In addition to these cash flows, Aaron expects to pay $33,500 for the equipment. He also expects to pay $7,400 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 $5,700 salvage value and a four-year useful life. Aaron desires to earn a rate of return of 5 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required a. Calculate the net present value of the investment opportunity. Note: Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places. b. 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. a. Net present value b. Will the return be above or below the cost of capital? b. Should the investment opportunity be accepted? $ 35,200.00
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps with 2 images

Blurred answer
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education