Topless: A sporty convertible with a cost of $100,000 and a useful life of 5 years. It will produce rental income of $60,000 per year and operating costs of $10,000 per year. A major service is required after 3 years costing $15,000. A salvage value of $25,000 is expected after 5 Years. The required return is 10%.

 Canopy: A rugged off road vehicle costing $150,000 but with an expected useful life of only 3 years, due to the harsh conditions. It will produce rental income of $100,000 per year and operating costs of $20,000 per year. A major service is required after 2 years costing $10,000. A salvage value of $50,000 is expected after 3 Years. The required rate of return is 12%.

 Income tax can be ignored.

 

Required

(1) The NPV's of the two cars.

(2) An analysis of the two cars assuming they are mutually exclusive and can be repeated indefinitely.

Answer rating: 100% (QA)

SOLUTION 1 NPV calculations Topless Year 0 Cost 100000 Year 1 Cash flow Rental income 60000 Operatin... View the full answer