Chapter 16, Problem 6E

Exercise 10-6A Determining net present value

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
2019	$25,000	$12,000
2020	29,000	16,000
2021	32,000	18,000
2022	32,000	18,000

In addition to these cash flows, Aaron expects to pay $25,000 for the equipment. He also expects to pay $4,000 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 $4,000 salvage value and a four-year useful life. Aaron desires to earn a rate of return of 8 percent.

Required

Round your computations to two decimal points.

1. a. Calculate the net present value of the investment opportunity.
2. b. 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.