Video Rental Store is considering the purchase of an almost new minivan to deliv

Question

Video Rental Store is considering the purchase of an almost new minivan to deliver and
pick up video tapes from customers. The minivan will cost $45,000 and is expected to last 8
years. However, the minivan's engine will need to be overhauled at a cost of $4,000 at the
end of year 3. In addition, purchasing the minivan would require an immediate investment of
$20,000 in working capital which would be released for investment elsewhere at the end of the
8 years. The minivan is expected to have a $10,000 salvage value at the end of 8 years. This
delivery service is expected to generate net cash inflows of $20,000 per year in each of the
8 years. Apnea's cost of capital is 15%.
Calculate the net present value (NPV) of this investment opportunity. Do not use decimals in
your answer.

Explanation / Answer

   CALCULATION OF NPV

PARTICULARS YEAR CASH FLOW TABLE FACTOR PRESENT VALUE

MACHINERY PURCHASED 1 (45000) 1 (45000)

WORKING CAPITAL 1 (20000) 1 (20000)

OVERHAULING 3 4000 0.6575 (2630)

NET CASH FLOWS 1-8 20000 4.4873 89746

WORKING CAPITAL 8 20000 0.3269 6538

SALVAGE VALUE 8 10000 0.3269 3269

     NPV $31923

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