Question

Brett Dunlop 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. Brett 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.
In addition to these cash flows, Mr. Dunlop expects to pay $21,000 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 $1,500 salvage value and a four-year useful life. Mr. Dunlop desires to earn a rate of return of 8 percent.

Required
Round your computations to two decimal points.
a. Calculate the net present value of the investment opportunity.
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.



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  • CreatedFebruary 07, 2014
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