Question

Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $51,000. The object is to save on horse transporter rentals.

Marsha had been renting a transporter every other week for $216 per week plus $1.80 per mile. Most of the trips are 90 miles in total. Marsha usually gives the driver a $45 tip. With the new transporter she will only have to pay for diesel fuel and maintenance, at about $.61 per mile. Insurance costs for Marsha’s transporter are $2,000 per year.

The transporter will probably be worth $31,000 (in real terms) after eight years, when Marsha’s horse Nike will be ready to retire. Assume a nominal discount rate of 9% and a forecasted inflation rate of 4%. Marsha’s transporter is a personal outlay, not a business or financial investment, so taxes can be ignored. Hint: All numbers given in the questions are in real terms. Assume CF at end of year, for simplicity.

Calculate the NPV of the investment. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

NPV            $   

Answer 1

Marsha's expense in a year when transporter on rent = ($216 + $1.80 * 90 + 45) * 26 = $10,998

Marsha's expense in a year with own transporter = $0.61 * 90 * 26 + $2000 = $3,427.40

Marsha's saving i.e. cash flow every year with own transporter = $10,998 - $3,427.40 = $7,570.60

Year 8 cash flow = $7,570.60 + $31,000(salvage value of transporter) = $38,570.60

Since salvage value is in real term means no inflation will apply on salvage value.