John a school teacher has received $$100,000$ donation. He wants to advertise to current students to suggest best ways of deploying the donation. Some ideas have been floated as below:

Idea $1-$ SUVs: each car will cost $$45,000$ to buy and register title of the car. The group

championing this idea projects that each car will generate $$15,000$ in cash each year. Each car

will have an expected life of $5$ years.

Idea $2$ Saloon cars: each car will cost $$27,000$ to buy and register titles. Cash inflow for each is

expected to be $$10,000$ each year. Each car will have an expected life of $5$ years.

Evaluate the two ideas based on the following questions:

$1.$ How long will it take John's classroom

to pay off $($recover the investment$)$ each car? How many

cars can be bought for each idea?

$2.$ Calculate the present value of each car$$s expected cash inflows assuming discount rate

of $6\%.$

$3.$ Which idea will you recommend based on your computations? Can you think of other

issues to consider?

Even though you made a recommendation, you have cold feet. You do not expect the cash

flows to be uniform. Instead, you think that $30\%$ of all cash inflows will occur in Year $1,20\%$

each in Years $2$ and $3,$ and $15\%$ each in Years $4$ and $5.$

$4.$ Which idea will you recommend based on your computations? Can you think of other

issues to consider?

$5.$ Assume you can mix up the alternatives $($e$.$g$.,$ you can recommend

an SUV and $2$

saloon cars$).$ Will your recommendations differ from that above?