Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Aaron Heath is seeking part - time employment while he attends school. He is considering purchasing technical equipment that will enable him to start a

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 Cash Inflow Cash Outflow
Year 1 $33,000 $16,000
Year 237,00020,000
Year 340,00022,000
Year 440,00022,000
In addition to these cash flows, Aaron expects to pay $29,000 for the equipment. He also expects to pay $5,600 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 $4,800 salvage value and a four-year useful life. Aaron desires to earn a rate of return of 5 percent. (PV of $1 and PVA of $1)
Note: Use appropriate factor(s) from the tables provided.
Required
Calculate the net present value of the investment opportunity.
Note: Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places.
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.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting

Authors: Robert Libby, Patricia Libby, Daniel Short, George Kanaan, Maureen Sterling

7th Canadian Edition

1260065952, 978-1260065954

More Books

Students also viewed these Accounting questions