Question

. 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 $0.45 per mile. Insurance costs for Marsha’s transporter are $1,200 per year. The transporter will probably be worth $15,000 (in real terms) after eight years, when Marsha’s horse Spike, will be ready to retire. Is the transporter a positive-NPV investment? Assume a nominal discount rate of 9% and a 3% forecasted inflation rate. Marsha’s transporter is a personal outlay, and not a business or financial investment, so taxes can be ignored.

Answer 1

Ans.

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8
Investment	$ (35,000.00)
Saving		$   8,580.00	$   8,580.00	$   8,580.00	$   8,580.00	$   8,580.00	$   8,580.00	$   8,580.00	$   8,580.00	26*[200+40+90*1]
Insurance		$ (1,200.00)	$ (1,200.00)	$ (1,200.00)	$ (1,200.00)	$ (1,200.00)	$ (1,200.00)	$ (1,200.00)	$ (1,200.00)
Fuel		$ (1,053.00)	$ (1,053.00)	$ (1,053.00)	$ (1,053.00)	$ (1,053.00)	$ (1,053.00)	$ (1,053.00)	$ (1,053.00)	90*26*0.45
Net Cash Flows	$ (35,000.00)	$   6,327.00	$   6,327.00	$   6,327.00	$   6,327.00	$   6,327.00	$   6,327.00	$   6,327.00	$   6,327.00
Discount Factor @ 5.83%	1	0.94491165	0.89285803	0.84367195	0.79719546	0.75327928	0.71178236	0.67257145	0.6355206
Present Value	$ (35,000.00)	$   5,978.46	$   5,649.11	$   5,337.91	$   5,043.86	$   4,766.00	$   4,503.45	$   4,255.36	$   4,020.94
Net Present Value	$      4,555.08

Real Interest Rate

[1+9% / 1 + 3% ] -1 = 5.83%

  So the NPV is $ 4,555.08