Question
In: Finance
11-X CAPITAL BUDGETING & SALVAGE VALUE. An emergency response company can purchase a new ambulance for...
11-X
CAPITAL BUDGETING & SALVAGE VALUE.
An emergency response company can purchase a new ambulance for $150,000 and must add $100,000 of equipment, for a total cost of $250,000.
The company projects that its net cash flow over the next five years will be: $65,000, $75,000, $100,000, $68,000, $73,000. The salvage value of the vehicle will be $13,000 at the end of year 5. Assume that the vehicle is sold at the end of year 5.
Calculate the NPV of the ambulance if the required rate of return is 9.0%.
Please show step by step, thank you ~
Solutions
Expert Solution
Net Present Value (NPV) of the Ambulance
Initial Investment
Initial Investment = Purchas price of the new Ambulance + Amount for the additional equipment
= $150,000 + $100,000
= $250,000
Present Value of the annual cash inflows
|
Year |
Annual Cash Flow ($) |
Present Value factor at 9% |
Present Value of Cash Flow ($) |
|
1 |
65,000 |
0.917431 |
59,633.03 |
|
2 |
75,000 |
0.841680 |
63,126.00 |
|
3 |
1,00,000 |
0.772183 |
77,218.35 |
|
4 |
68,000 |
0.708425 |
48,172.91 |
|
5 |
73,000 |
0.649931 |
47,444.99 |
|
5 |
13,000 |
0.649931 |
8,449.11 |
|
TOTAL |
3,04,044.39 |
||
Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment
= $3,04,044.39 - $250,000
= $54,044.39
“Hence, the Net Present Value (NPV) of the Ambulance = $54,044.39”
NOTE
The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.
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