Question

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	Cash Inflow			Cash Outflow
Year 1	$	14,200		$	9,800
Year 2		18,700			11,300
Year 3		22,400			12,600
Year 4		22,400			12,600

In addition to these cash flows, Aaron expects to pay $20,800 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 $1,500 salvage value and a four-year useful life. Aaron 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.)

Required

1. 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.)

2. 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.

Answer 1

Year	Cash inflow (A)	Cash outflow (B)	Additional Cost (C )	Net cash inflows (D= A - B- C)	PVF E = (8%)	Present value of cash flows (D x E)
1	$14,200	$9,800		$4,400	0.92593	$4,074.09
2	$18,700	$11,300	$2,900	$4,500	0.85734	$3,858.03
3	$22,400	$12,600		$9,800	0.79383	$7,779.53
4	$22,400	$12,600		$9,800	0.73503	$7,203.29
4	Salvage Value			$1,500	0.73503	$1,102.55
	Initial investment					($20,800)
Total			Net Present value			$3,217.49
	Net Present Value	$3,217.49
	investment opportunity is expected to earn a above the return of cost of capital
	Yes, the investment opportunity Should be accepted as there is a Positive NPV