Question

At the beginning of 2015, market analysts expect Rent-a-Car, Inc, holder of a brand new fleet of 25 cars, to earn the following stream of economic profits over the next five years. At the end of five years, Rent-a-Car plan to sell its entire fleet in the used car market for $6,000 per vehicles, and analysts expect economic profit to be zero afterwards.

2015 $225,000
2016 $325,000
2017 $425,000
2018 $200,000
2019 $100,000

If an investor apply an annual risk-adjusted discount rate of 10% and decides to delay his/her investment until the beginning of 2017, the acquisition offer should be no more than $___________.

A. $521,729

B. $518,004

C. $611,142

D. $879,737

E. $739,482

Answer 1

Correct Answer:

A

Working note:

If investment is delayed until the beginning of 2017, then:

PW of the investment = 425000/1.1^3 + 200000/1.1^4 + 100000/1.1^5 + 6000/1.1^5

PW of the investment = $521729.14 or $521729