Question

Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $36,000. The object is to save on horse transporter rentals. Marsha had been renting a transporter every other week for $201 per week plus $1.05 per mile. Most of the trips are 90 miles in total. Marsha usually gives the driver a $45 tip. With the new transporter she will only have to pay for diesel fuel and maintenance, at about $.46 per mile. Insurance costs for Marshas transporter are $1,250 per year The transporter will probably be worth S 16,000 in real terms a er egh years, when Marsha s orse e il be ready to retire. Assume a ror a d count rate o 10% ar a ore ste ation rate O Mars as transporter is a personal outlay, not a business or financial investment, so taxes can be ignored. Hint: All numbers given in the questions are in real terms. Assume CF at end of year, for simplicity. Calculate the NPV of the investment. (Do not round intermediate calculations. Round your answer to the nearest whole dollaramount.) NPV

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Answer #1

We will calculate the incremental cash flow and then calculate the NPV

Renting cash flows Rent per week Trips Cost per mile Tips Total cost per weelk No. of weeks per yr Cost per year 201 90 1.05 45 340.50 52 miles 17,706.00 Owningp Cash flows Diesel fuel & maintenance cost per mile No. of miles per year Insurance Total cost 0.46 4680 1250 3402.8 Savings per year 14,303.20 0 4 6 8 Cost Savings Worth Cash flow 36000 14,303.20 14,303.20 14,303.20 14,303.20 14,303.20 14,303.20 14,303.20 14,303.20 16000 36000 14303.2 14303.2 14303.2 14303.2 14303.2 14303.2 14303.2 30303.2 Nominal return Inflation Real return 10% 4% 5.77% NPV 63852

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