Question

Linda’s Luxury Travel (LLT) is considering the purchase of two Hummer limousines. Various information about the proposed investment follows:   

Initial investment (2 limos)	$	840,000
Useful life		10	years
Salvage value	$	120,000
Annual net income generated		70,560
LLT’s cost of capital		14	%

3. Net present value. (Future Value of $1. Present Value of $1 Future Value Annuity f $1 Present Value Annuity of $1. Use appropriate factor s from the tables provided. Do not round intermediate calculations. Cash Outflows and negative amounts should be indicated by a minus sign. Round your "Present Values" to the nearest whole dollar amount.) Table or Calculator Function resent Value of $1 Cash Outflow (Beginning of the Year) 840,000 14 % Present Value 840,000 Table or Calculator Function resent Value Annuity of $1 Cash Infiow (for Next 10 Years) 142.560 10 141% Table Factor 5.2161 Present Value Table or Calculator Function Present Value of $1 Cash Infiow (for 10th Year) 120,000 10 i= Table Factor 0.2697 Present Value Total Net Present Value

Answer 1

Table or Calculator Function:	Present Value of $1
Cash outflow( Beginning of the Year)	$ 840,000
n =	0
i=	14%
Present Value	$ 840,000
Table or Calculator Function :	Present Value Annuity of $1
Cash inflow (for next 10 years) ($70760 per car)	$142,560
n =	10
i=	14%
Table Factor	5.2161
Present Value	$743,607.216
Table or Calculator Function :	Present Value of $1
Cash inflow (for 10th year)	$ 120,000
n=	10
i=	14%
Table Factor	0.2697
Present Value	$32,364
Total Net Present Value	-$ 64,028.784

Since the Present value of cash outflows (i.e the purchase price of the Limo) exceeds the Present Value of Cash inflows (i.e Annual return+Salvage value), the investor should restrain from purchasing the Limousines.