Question

Chief Candace Miller of the roposal to the city's budget dir She estimates the department new cars. The cars will cost the s police car is only four er of the Jefferson City police department has submitted doet director requesting the purchase of ten new police department will save $20,000.00 a year by having the vill cost the city $200,000.00. Unfortunately, the life span of only four years at best. Using a 7% discount rate, calculate cars. She esti value of the proposal. Explain the results. present value of th being the above example, calculate the NPV using the following data: Disa e = 5%, Cost of Cars = $185,000.00, Annual Savings = $90,000.00, Life span of car = 5 years. Explain the results. count Rate = 5%. Cost

Answer 1

1.
NPV=-200000+20000/7%*(1-1/1.07^4)
=-132255.77487

NPV is negative so dont purchase cars as costs outweigh the benefits

2.
=-185000+90000/5%*(1-1/1.05^5)
=204652.90036

NPV is positive so purchase the cars as benefits outweigh the costs