Question

In: Finance

Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $43,000....

Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $43,000. The object is to save on horse transporter rentals.

Marsha had been renting a transporter every other week for $208 per day plus $1.40 per mile. Most of the trips are 80 or 100 miles in total. Marsha usually gives Joe Laminitis, the driver, a $35 tip. With the new transporter she will only have to pay for diesel fuel and maintenance, at about $0.53 per mile. Insurance costs for Marsha’s transporter are $1,600 per year.

The transporter will probably be worth $23,000 (in real terms) after eight years, when Marsha’s horse Spike will be ready to retire. Assume a nominal discount rate of 9% and a 2% forecasted inflation rate. Marsha’s transporter is a personal outlay, not a business or financial investment, so taxes can be ignored.

Calculate the NPV of the investment.

Solutions

Expert Solution

Given data:

Nominal discount rate is 9% and forecast inflation rate is 2%

Real rate of discount is =(1+r nominal)/(1+inflation rate ) -1

Real rate of discount = (1+0.09)/(1+0.02)-1 =0.0686 i.e 6.86%

Now Calculating the Net Present Value
t=0 t=1 t=2 t=3 t=4 t=5 t=6 t=7 t=8
Investments -43000 23000
Savings(refer note1) 9594 9594 9594 9594 9594 9594 9594 9594
Insurance -1600 -1600 -1600 -1600 -1600 -1600 -1600 -1600
Fuel refer note 2 -1240 -1240 -1240 -1240 -1240 -1240 -1240 -1240
Net CashFlow -43000 6754 6754 6754 6754 6754 6754 6754 29754
FVIF at 6.86% refer note 3 1.0000 1.0686 1.1420 1.2203 1.3041 1.3936 1.4892 1.5914 1.7006
PV of Cash Flows -43000 6320 5914 5534 5179 4846 4535 4244 17496
NPV of CashFlows 11069
Note1:
Annual Savings are calculated as below
under old system 208+35+(1.4*(80+100)/2) 369.0
Renting is done every other week 26 weeks per year
Savings 369*26 9594
Note 2
Fuel calculation ((80+100)/2)*0.53*26 1240.2
Note 3
Formula for FVIF calculation (1+r)^t

Related Solutions

. Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost...
. Marsha Jones has bought a used Mercedes horse transporter for 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 driver, Joe Laminitis, a $40 tip. With the new transporter she will only have to pay for diesel fuel and maintenance, at...
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $50,000....
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $50,000. The object is to save on horse transporter rentals. Marsha had been renting a transporter every other week for $215 per day plus $1.75 per mile. Most of the trips are 80 or 100 miles in total. Marsha usually gives Joe Laminitis, the driver, a $40 tip. With the new transporter she will only have to pay for diesel fuel and maintenance, at about...
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $46,000....
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $46,000. The object is to save on horse transporter rentals. Marsha had been renting a transporter every other week for $211 per week plus $1.55 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 $.56 per mile. Insurance...
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $35,000....
Marsha Jones has bought a used Mercedes horse transporter for 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 driver, Joe Laminitis, a $40 tip. With the new transporter she will only have to pay for diesel fuel and maintenance, at about...
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $36,000....
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $36,000. The object is to save on 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. With the new transporter she will only have to pay for diesel fuel and maintenance, at about...
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $35,000....
Marsha Jones has bought a used Mercedes horse transporter for 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 driver, Joe Laminitis, a $40 tip. With the new transporter she will only have to pay for diesel fuel and maintenance, at about...
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $36,000....
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $36,000. The object is to save on horse transporter rentals. Marsha had been renting a transporter every other week for $201 per week plus $1.05 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 $.46 per mile. Insurance...
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $50,000....
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $50,000. The object is to save on horse transporter rentals. Marsha had been renting a transporter every other week for $215 per week plus $1.75 per mile. Most of the trips are 90 miles in total. Marsha usually gives the driver a $40 tip. With the new transporter she will only have to pay for diesel fuel and maintenance, at about $.60 per mile. Insurance...
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $41,000....
Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $41,000. The object is to save on horse transporter rentals. Marsha had been renting a transporter every other week for $206 per week plus $1.30 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 $.51 per mile. Insurance...
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...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT