Question

Your truck has a market value of $58,600. You can sell it to your brother, who agreed to buy it now and pay $74,600 three years from now, or you can sell it to your cousin who agreed to pay you $64,500 at the end of the year. To whom should you sell the truck if your cost of capital is 9 percent? (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answers to 2 decimal places, e.g. 25.25.)

NPV, brother		$
NPV, cousin		$
You should sell the truck to your cousin brother .

Answer 1

Pls find below steps, workings and answer;

Using the NPV approach, the value of the sale against the market value can be determined; Also, NPV approach helps in considering the time value of the money;

In this case, the NPV based on selling to brother is negative $ 995.11 and the NPV based on selling to Cousin is positive $ 574.31; Hence, it is recommended to sell the truck to cousin.

YEAR Year 1 Year 2 Year 0 -58,600 -58,600 Year 3 74,600 Brother Cousin 64,500 Discounting Factor 9.00% YEAR Discounting Factor Year 0 1.0000 Year 1 0.9174 Year 2 0.8417 Year 3 0.7722 Discounted Cash Flow Brother Cousin 57,604.89 -58,600.00 -58,600.00 NPV -995.11 574.31 59,174.31

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;