Nixon Holiday has decided to start a small delivery business to help support himself while attending school.

Question:

Nixon Holiday has decided to start a small delivery business to help support himself while attending school. Mr. Holiday expects demand for delivery services to grow steadily as customers discover their availability. Annual cash outflows are expected to increase only slightly because many of the business operating costs are fixed. Cash inflows and outflows expected from operating the delivery business follow:

The used delivery van Mr. Holiday plans to buy is expected to cost $18,000. It has an expected useful life of four years and a salvage value of $4,000. At the end of 2016, Mr. Holiday expects to pay additional costs of approximately $800 for maintenance and new tires. Mr. Holiday€™s desired rate of return is 10 percent.

Required
Round computations to the nearest whole penny.
a. Calculate the net present value of the investment opportunity.
b. Indicate whether the investment opportunity is expected to earn a return above or below the desired rate of return. Should Mr. Holiday start the deliverybusiness?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...