Answered: per year. Triple Crown's discount rate…

per year. Triple Crown's discount rate is 12%. What is the net present value of this investment opportunity? Should they invest in the cooler?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Conversion Cycle

Conversion cycle is also known as cash cycle or net operating cycle. Conversion cycle refers to how much time a company takes to turn its investments which is done from stock or any other financial resources into cash flows from sales.

Question

10. Triple Crown is considering installing a new cooler (equipment) in order to increase the volume
and variety of beverages they can offer. The new cooler will cost $26,000. It is expected to last 7
years but only if the cooler is overhauled (REPAIRED) at a cost of $4,000 at the end of year 4. The
new cooler is expected to have a $2,000 salvage value at the end of 7 years. The new cooler is
expected to generate additional revenues of $15,000 per year with an increase in expenses of $9,000
per year. Triple Crown's discount rate is 12%. What is the net present value of this investment
opportunity? Should they invest in the cooler?
Hint: determine the PV of each item. Be careful if the item is an annuity (anmual) or one time only event.
PV of an annuity of S1
PV of S1
Time
10%
12%
14%
Time
10%
12%
14%
period
1
period
0.909
0.893
0.877
1
0.909
0.893
0.877
1.736
1.690
1.647
2
0.826
0.797
0.769
3
2.487
2.402
2.322
3
0.751
0.712
0.675
4
3.170
3.037
2.914
4
0.683
0.636
0.592
5
3.791
3.605
3.433
5
0.621
0.567
0.519
6
4.355
4.111
3.889
6.
0.564
0.507
0.456
7
4.868
4.564
4.288
7
0.513
0.452
0.400
8
5.335
4.968
4.639
8
0.467
0.404
0.351

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