Drake Limousine Service is considering acquisition of an additional vehicle. The model under consideration will cost $160,000 and have a five-year life and a $45,000 residual value. The company anticipates that the effect on annual net income will be as follows:

Required

Calculate the net present value of the investment assuming the company has a required rate of return of 14 percent. Should the company invest in the new limousine?

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$120,000 Revenue Less expenses: 60,000 9,000 2,000 Driver Fuel Maintenance Insurance 1,800 Depreciation 15,000 Miscellaneous 2,000 89,800 30,200 Total expense Income before taxes Taxes at 40% 12,080 $ 18,120 Net income