QUESTION EIGHT The directors of Shenzhen Rail Ltd are considering the purchase of a new high-speed train. The details of the proposal are as follows: Cost: $6,000,000 Additional revenues generated per year: $1,500,000 Additional operating and maintenance costs per year: $260,000 Required rate of return: 12 per cent. (All cash flows occur at the end of each year) The company has a policy of keeping its trains for only four years. Consistent with this policy, if the new train is purchased it will be traded-in on a new train after four years. At that time the train is expected to have a trade-in value of $1,500,000 Required (a) Calculate the net present value for the proposed purchase of a new high-speed train and specify whether the project is acceptable. (show all workings) (7 marks) (b) Explain how money is said to have a "time value' (3 marks) (10 marks)