Luxury Transportation LLC would like to purchase several limousines at a cost of $260,000. Additional equipment needed to maintain the limousines will be purchased at the end of year 2 for $40,000. The limousines are expected to have a life of 8 years, and a salvage value of $20,000. Annual costs for maintenance, insurance, and other cash expenses will total $42,000. Annual net cash receipts resulting from this purchase are predicted to be $135,000. The companys required rate of return is 14 percent.

Required:

1. Find the net present value of this investment using the format presented in Figure 6.4.

2. Should the company purchase the limousines? Explain.

(A) Cash Flow In (Out) (B) Present Value Factor (r= 10%) (A) x (B) Present Value Item Description Purchase price (today) Annual maintenance costs (years 1-7) Annual labor savings (years 1-7) Salvage value (end of year 7) Net present value $ (50,000) (1,000) 11,000 5,000 1.000* 4.8684** 4.8684** 0.5132* $ (50,000) (4,868) 53,552 2,566 $ 1,250