Question

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 $0.46 per mile. Insurance costs for Marsha’s transporter are $1,250 per year.

The transporter will probably be worth $16,000 (in real terms) after eight years, when Marsha’s horse Spike will be ready to retire. Assume a nominal discount rate of 10% and a 4% 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. (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.)

Answer 1

Cash flows from renting -

Rent per day for every other week = 201

Rent per year = 201 * 7 * 26 = 36,582

Per mile cost = 1.05

Average Miles = 90

Mile cost per year = 1.05 * 90 * 7 * 26 = 17,199

Tips = 45

Total tips cost per year = 45 * 7 * 26 = 8,190

Total costs for renting = 61,971

Cash flows from owning -

Diesel, fuel and maintenance per mile = 0.46

Average miles = 90

Diesel, fuel and maintenance cost per year = 0.46 * 90 * 7 * 26 = 7,535

Insurance costs per year = 1,250

Total tips costs per year = 45 * 7 * 26 = 8,190

Total costs from owning = 16,975

* Costs will be changed if assumptions are changed *

Total savings = 44,996 (assumed in 0 year)

NPV calculation -

Year 0    Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Cash outflow (36,000)

Net savings 46,796 48,668 50,614 52,639 54,745 56,934    59,212  

Cash inflow

Net cash flow (1) (36,000)   46,796 48,668 50,614 52,639 54,745 56,934    59,212

Present Value (2) 1 0.91 0.83 0.75 0.68 0.62 0.56 0.51

(1) * (2) (36,000) 42,584 40,394 37,961      35,795 33,942    31,883 30,198

Year 8 Year 9 Year 10   TOTAL

Cash outflow

Net savings 61,580 64,043 66,605

Cash inflow 16,000

Net cash flow (1) 61,580 64,043 82,605

Present Value (2) 0.47   0.42 0.39

(1) * (2) 28,943 26,898    32,216   304,814

NPV on basis of assumptions taken = $ 304,814