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 Year 1 $ 14,300 $ 8,700 Year 2 18,800 11,500 Year 3 22,100 13,400 Year 4 22,100 13,400 In addition to these cash flows, Aaron expects to pay $20,100 for the equipment. He also expects to pay $3,600 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 $1,800 salvage value and a four-year useful life. Aaron desires to earn a rate of return of 8 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required Calculate the net present value of the investment opportunity. (Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places.) Indicate whether the investment opportunity is expected to earn a return that is above or below the desired rate of return and whether it should be accepted.
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 | ||||||
| Year 1 | $ | 14,300 | $ | 8,700 | ||
| Year 2 | 18,800 | 11,500 | ||||
| Year 3 | 22,100 | 13,400 | ||||
| Year 4 | 22,100 | 13,400 | ||||
In addition to these cash flows, Aaron expects to pay $20,100 for the equipment. He also expects to pay $3,600 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 $1,800 salvage value and a four-year useful life. Aaron desires to earn a
Required
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Calculate the
net present value of the investment opportunity. (Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places.) -
Indicate whether the investment opportunity is expected to earn a return that is above or below the desired rate of return and whether it should be accepted.
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