Dimitry Chernitsky is seeking part-time employment while he attends school. He i

Question

Dimitry Chernitsky 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. Dimitry 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.

Year of Operation Cash Inflow Cash Outflow
2012 $ 14,100 $ 9,600
2013 19,300 11,700
2014 21,700 12,800
2015 21,700 12,800


In addition to these cash flows, Mr. Chernitsky expects to pay $21,300 for the equipment. He also expects to pay $2,800 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 $1,200 salvage value and a four year useful life. Mr. Chernitsky desires to earn a rate of return of 8 percent.

Use Table 1.

Required:
a.

Calculate the net present value of the investment opportunity. (Round "PV Factor" to 6 decimal places, intermediate and final answers to 2 decimal places. Negative amount should be indicated by a minus sign. Omit the "$" sign in your response.)

Net present value $

Explanation / Answer

Net operating cash flows for: Year 1 (2012): 14100 - 9600 = $4500 Year 2 (2013): 19300 - 11700 = $7600 Year 3 (2014):21700 - 12800 = $8900 Year 4 (2015): 21700 - 12800 = $8900 Total cashflows for: Year 0: -$21300 Year 1: $4500 Year 2: 7600 - 2800 = $4800 Year 3: $8900 Year 4: 8900 + 1200 = $10,100 Discount factors at 8% Year 0: 1.000000 Year 1: 0.925926 Year 2: 0.857339 Year 3: 0.793832 Year 4: 0.735030 Present value Year 0: 1.000000 x -21300 = -21300 Year 1: 0.925926 x 4500 = 4166.67 Year 2: 0.857339 x 4800 = 4115.23 Year 3: 0.793832 x 8900 = 7065.10 Year 4: 0.735030 x 10100 = 7423.80 Net Present value = sum of all PV = $1470.80 (positive) The investment opportunity is expected to earn a return that is above the desired rate of return. The investment opportunity be accepted

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