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 Cash Inflow Cash Outflow $14,400 Year 2 19,200 Year 3 Year 4 21,100 21,100 $ 9,100 11,400 12,900 12,900 In addition to these cash flows, Aaron expects to pay $21,500 for the equipment. He also expects to pay $2,900 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 $1,700 salvage value and a four year useful life. Aaron desires to earn a rate of return of 9 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. 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.) 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? Should the investment opportunity be accepted?
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 Cash Inflow Cash Outflow $14,400 Year 2 19,200 Year 3 Year 4 21,100 21,100 $ 9,100 11,400 12,900 12,900 In addition to these cash flows, Aaron expects to pay $21,500 for the equipment. He also expects to pay $2,900 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 $1,700 salvage value and a four year useful life. Aaron desires to earn a rate of return of 9 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. 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.) 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? Should the investment opportunity be accepted?
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter1: Introduction To Cost Management
Section: Chapter Questions
Problem 4E: Consider the following thoughts of a manager at the end of the companys third quarter: If I can...
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Transcribed Image Text: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
Cash Inflow Cash Outflow
$14,400
Year 2
19,200
Year 3
Year 4
21,100
21,100
$ 9,100
11,400
12,900
12,900
In addition to these cash flows, Aaron expects to pay $21,500 for the equipment. He also expects
to pay $2,900 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 $1,700 salvage value and a four year useful life.
Aaron desires to earn a rate of return of 9 percent. (PV of $1 and PVA of $1) (Use appropriate
factor(s) from the tables provided.)
Required
a. 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.)
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?
Should the investment opportunity be accepted?
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