2 5 book Aaron Heath 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. Aaron 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 Year 2 Year 3 Year 4 Cash Inflow Cash Outflow $12,800 21,900 11,300 13,300 13,300 In addition to these cash flows, Aaron expects to pay $21,900 for the equipment. He also expects to pay $2.700 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 $1,800 salvage value and a four year useful ife. Aaron desires to earn a rate of return of 12 percent. (PV of and EVA of53) (Use appropriate factor(s) from the tables provided.) Required a. Calculate the net present value of the investment opportunity. (Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places.) 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. a Net present value Wil the retum be above or below the cost of capital? Should the investment opportunity be accepted? TABLE 1 PRESENT VALUE OF $1 4 5 6 8 4% 5% 6% 7% 9% 12% 14% 16% 8% 10% 20% 0.961538 0.952381 0.943396 0.934579 0.925926 0.917431 0.909091 0.892857 0.877193 0.862069 0.833333 2 0.924556 0.907029 0.889996 0.873439 0.857339 0.841680 0.826446 0.797194 0.769468 0.743163 0.694444 3 0.888996 0.863838 0.839619 0.816298 0.793832 0.772183 0.751315 0.711780 0.674972 0.640658 0.578704 0.854804 0.822702 0.792094 0.762895 0.735030 0.708425 0.683013 0.635518 0.592080 0.552291 0.482253 0.821927 0.783526 0.747258 0.712986 0.680583 0.649931 0.620921 0.567427 0.519369 0.476113 0.401878 0.790315 0.746215 0.704961 0.666342 0.630170 0.596267 0.564474 0.506631 0.455587 0.410442 0.334898 7 0.759918 0.710681 0.665057 0.622750 0.583490 0.547034 0.513158 0.452349 0.399637 0.353830 0.279082 0.730690 0.676839 0.627412 0.582009 0.540269 0.501866 0.466507 0.403883 0.350559 0.305025 0.232568 9 0.702587 0.644609 0.591898 0.543934 0.500249 0.460428 0.424098 0.360610 0.307508 0.262953 0.193807 10 0.675564 0.613913 0.558395 0.508349 0.463193 0.422411 0.385543 0.321973 0.269744 0.226684 0.161506 11 0.649581 0.584679 0.526788 0.475093 0.428883 0.387533 0.350494 0.287476 0.236617 0.195417 0.134588 12 0.624597 0.556837 0.496969 0.444012 0.397114 0.355535 0.318631 0.256675 0.207559 0.168463 0.112157 13 0.600574 0.530321 0.468839 0.414964 0.367698 0.326179 0.289664 0.229174 0.182069 0.145227 0.093464 14 0.577475 0.505068 0.442301 0.387817 0.340461 0.299246 0.263331 0.204620 0.159710 0.125195 0.077887 15 0.555265 0.481017 0.417265 0.362446 0.315242 0.274538 0.239392 0.182696 0.140096 0.107927 0.064905 16 0.533908 0.458112 0.393646 0.338735 0.291890 0.251870 0.217629 0.163122 0.122892 0.093041 0.054088 17 0.513373 0.436297 0.371364 0.316574 0.270269 0.231073 0.197845 0.145644 0.107800 0.080207 0.045073 18 0.493628 0.415521 0.350344 0.295864 0.250249 0.211994 0.179859 0.130040 0.094561 0.069144 0.037561 19 0.474642 0.395734 0.330513 0.276508 0.231712 0.194490 0.163508 0.116107 0.082948 0.059607 0.031301 20 0.456387 0.376889 0.311805 0.258419 0.214548 0.178431 0.148644 0.103667 0.072762 0.051385 0.026084 TABLE 2 PRESENT VALUE OF AN ANNUITY OF $1 4% 0.961538 5% 6% 0.952381 0.943396 1.886095 1.859410 1.833393 3 2.775091 2.723248 2.673012 4 3.629895 3.545951 3.465106 3,387211 5 4.451822 4.329477 4.212364 6 5.242137 5.075692 4.917324 7 6.002055 5.786373 5.582381 8 6.732745 6.463213 9 7.435332 10 8.110896 11 8.760477 12 9.385074 13 9.985648 14 10.563123 15 11.118387 19 20 16 11.652296 17 12.165669 18 12.659297 13.133939 10.059087 10.335595 11.469921 10.594014 8% 9% 10% 0.925926 0.917431 0.909091 1.783265 1.759111 1.735537 2.577097 2.531295 2.486852 3.312127 3.239720 3.169865 3.992710 3.889651 3.790787 4.622880 4.485919 4.355261 5.389289 5.206370 5.032953 4.868419 6.209794 5.971299 5.746639 5.534819 5.334926 7.107822 6.801692 6.515232 6.246888 5.995247 5.759024 7.721735 7.360087 7.023582 6.710081 6.417658 8.306414 7.886875 7.495674 7.138964 6.005191 8.863252 8.383844 7.942686 7.536078 9.393573 8.852683 8.357651 7.903776 9.898641 9.294984 8.244237 10.379658 9.712249 10.837770 10.105895 11.274066 10.477260 11.689587 10.827603 12.085321 11.158116 13.590326 12.462210 7% 0.934579 1.808018 2.624316 12% 14% 0.892857 0.877193 1.690051 1.646661 2.401831 2.321632 4.100197 4.766540 5.328250 4.946372 16% 20% 0.862069 0.833333 1.605232 1.527778 2.245890 2.106481 3.037349 2.913712 2.798181 2.588735 3.604776 3.433081 3.274294 2.990612 4.111407 3.888668 3.684736 3.325510 4.563757 4.288305 4.038565 3.604592 4.967640 4.638864 4.343591 3.837160 4.606544 4.030967 6.144567 6.495061 7.160725 6.813692 7.486904 7.103356 5.650223 5.216116 4.833227 4.192472 5.937699 5.452733 5.028644 4.327060 6.194374 5.660292 5.197107 4.439217 6.423548 5.842362 5.342334 4.532681 8.745468 7.786150 7.366687 6.628168 9.107914 9.446649 8.559479 8.060688 7.606080 6.810864 9.763223 8.851369 9.121638 9.371887 9.603599 9.818147 9.128546 8.312558 7.823709 8.543631 8.021553 6.973986 7.119630 6.002072 5.467529 4.610567 6.142168 5.575456 4.675473 6.265060 5.668497 4.729561 6.372859 5.748704 4.774634 8.755625 8.201412 8.905115 8.364920 7.249670 6.467420 5.817848 4.812195 7.365777 6.550369 8.513564 7.469444 6.623131 5.877455 4.843496 5.928841 4.869580