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
2019	$	13,300		$	8,800
2020		20,300			11,800
2021		21,200			13,100
2022		21,200			13,100

In addition to these cash flows, Aaron expects to pay $20,700 for the equipment. He also expects to pay $3,300 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 $1,000 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

1. Calculate the net present value of the investment opportunity.

Answer 1