Dimitry Chernitsky is seeking part-time employment while he attends school. He is considering purchasing technical equipment that
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.
In addition to these cash flows, Mr. Chernitsky expects to pay $21,000 for the equipment. He also expects to pay $3,600 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 $1,500 salvage value and a four year useful life. Mr. Chernitsky desires to earn a rate of return of 8 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 that is above or below the desired rate of return and whether it should be accepted.
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...
Step by Step Answer:
Fundamental Managerial Accounting Concepts
ISBN: 978-0078110894
6th Edition
Authors: Edmonds, Tsay, olds