John decides to start a new taxi service in his spare time that he plans to mark

Question

John decides to start a new taxi service in his spare time that he plans to market towards students (that means cheap) that dont want to park on campus, underclassmen without cars, and those incapable of driving after visiting some of the downtown establishments. The first thing John needs to do is buy a car. After visiting Mr. Charming Salesman at Sundance Used Cars, he has narrowed his choices to 3 possibilities. The three cars John can afford and their yearley net revenues (fares - gas & maintenance) are listed below. Remember, each car must be replaced when it finally dies if you are to remain in business.

Year

Neon

Geo Metro

PT Cruiser

0

-$700

-$1600

-$3500

1

600

1000

1200

2

600

1000

1200

3

600

1200

4

1200

Assuming an appropriate discount rate of 4.5% which one would you buy? Why?

Year

Neon

Geo Metro

PT Cruiser

0

-$700

-$1600

-$3500

1

600

1000

1200

2

600

1000

1200

3

600

1200

4

1200

Explanation / Answer

STATEMENT SHOWING MUTUALLY EXCLUSIVE PROPOSAL :

PARTICULARS             TIME           P.V. FACTOR              NEON                          GEO METRO        PT CRUISER

                                                                                         AMOUNT   P.V.             AMOUNT   P.V.       AMOUNT  P.V.

CASH OUTFLOW        0                   1                             700             700              1600          1600       3500       3500

P.V.C.O (A)                                                                                        700                                 1600                      3500

CASH INFLOWS:

                                  1-3           2.74896436         600        1649.37862        

                                 1-2          1.87266775                                                      1000    1872.66775

                                 1-4          3.5875257                                                                                            1200 4305.0308

P.V.C.I (B)                                                                           1649.37862                       1872.66775              4305.030

N.P.V (B-A)                                                                     949.37862                            272.66775             805.0308

EQUIVALENT ANNUAL NPV:    NPV/ CUMULATIVE PVAF OF YEARS OF BENEFIT

NEON:             949.37862/2.74896436  = 345.35865

GEO METRO : 272.66775 /1.87266775 = 145.603912

PT CRUISER: 805.03084/ 3.5875257 = 224.397233

ADVISE: NEON IS UNDERTAKEN AS IT HAS HIGHER EQUIVALENT ANNUAL NPV.

NOTES: A) P.V. = P.V.F * AMOUNT

P.V.F :

YEAR

1            1 /1.045 = 0.9569378

2            1/1.045*1.045 = 0.91572995

3             1/1.045*1.045*1.045 = 0.87629661

4             1/1.045*1.045*1.045*1.045 = 0.83856134

N.P.V MEANS NET PRESENT VALUE

P.V.C.I MEANS PRESENT VALUE CASH INFLOW

P.V.C.O MEANS PRESENT VALUE OF CASH OUTFLOW

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