Question
In: Finance
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $47,000....
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $47,000. The object is to save on horse transporter rentals.
Marsha had been renting a transporter every other week for $212 per week plus $1.60 per mile. Most of the trips are 90 miles in total. Marsha usually gives the driver a $50 tip. With the new transporter she will only have to pay for diesel fuel and maintenance, at about $.57 per mile. Insurance costs for Marsha’s transporter are $1,800 per year.
The transporter will probably be worth $27,000 (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 3%. 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 $
Solutions
Expert Solution
Real discount rate=nominal discount rate-inflation rate=9%-3%=6%
Considering, 1 year=52 week, yearly rental savings=212*52=$11024
Per mile savings=(1.60-0.57)=$1.03 and hence yearly savings=1.03*90*52=4820.4
Driver's tip savings=52*50=2600
Now,
| Year | Initial Investment | Salavage Value | Rental Savings | Driver Tip savings | Fuel Savings | Insurace Cost | Cash Flow (Sum(B:G)) | Discounted cashflow (Cash flow/1.06^year) |
| 0 | (47,000.00) | - | - | - | - | - | (47,000.00) | (47,000.00) |
| 1 | - | - | 11,024.00 | 2,600.00 | 4,820.40 | (1,800.00) | 16,644.40 | 15,702.26 |
| 2 | - | - | 11,024.00 | 2,600.00 | 4,820.40 | (1,800.00) | 16,644.40 | 14,813.46 |
| 3 | - | - | 11,024.00 | 2,600.00 | 4,820.40 | (1,800.00) | 16,644.40 | 13,974.96 |
| 4 | - | - | 11,024.00 | 2,600.00 | 4,820.40 | (1,800.00) | 16,644.40 | 13,183.92 |
| 5 | - | - | 11,024.00 | 2,600.00 | 4,820.40 | (1,800.00) | 16,644.40 | 12,437.66 |
| 6 | - | - | 11,024.00 | 2,600.00 | 4,820.40 | (1,800.00) | 16,644.40 | 11,733.65 |
| 7 | - | - | 11,024.00 | 2,600.00 | 4,820.40 | (1,800.00) | 16,644.40 | 11,069.48 |
| 8 | - | 27,000.00 | 11,024.00 | 2,600.00 | 4,820.40 | (1,800.00) | 43,644.40 | 27,383.04 |
| NPV (Total Present Value) | 73,298.43 |
Hence, NPV=$73298
jeff jeffy answered 6 months agoRelated Solutions
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horse transporter rentals. Marsh had been renting a transporter
every other week for $200 per day plus $1.00 per mile. Most of the
trips are 80 or 100 miles in total. Marsha usually gives her
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horse transporter rentals.
Marsha had been renting a transporter every other week for $201 per
day plus $1.05 per mile. Most of the trips are 80 or 100 miles in
total. Marsha usually gives Joe Laminitis, the driver, a $45 tip.
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her Connecticut estate. It cost $35,000. The object is to save on
horse transporter rentals. Marsh had been renting a transporter
every other week for $200 per day plus $1.00 per mile. Most of the
trips are 80 or 100 miles in total. Marsha usually gives her
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Marsha had been renting a transporter every other week for $201
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