Question

Chief Candace Miller of Jefferson City police department has submitted a proposal to the city's budget director requesting the purchase of ten new police cars. She estimates the department will save $20,000.00 a year by having the new cars. The cars will cost the city $200,000.00. Unfortunately, the life span of a police car is only four years at best.Using a 7% discount rate, calculate the net present value of the proposal. Explain the results.

Discount rate =
Cost of cars =
Annual Savings =
Life span =
NPV = Annual Savings / (1+r) =
YEAR	SAVINGS	NPV	7% D.R.
1
2
3
4
5
	$0.00	$0.00
Amount Invested =
Total Present Value of Savings =		$0.00
Total Present Value of Annual Savings =		$0.00
Net Present Value (NPV) =
Explanation:

Answer 1

Discount rate	7%
Cost of cars	200,000.00	$
Annual savings	20,000.00	$
Life	4 years
NPV = Discounted inflow - Initial investment

Year	Cashflow	PV factor 7% [1/(1+r)]^n	PV
0	(200,000.00)	1.000	(200,000.00)
1	20,000.00	0.935	18,691.59
2	20,000.00	0.873	17,468.77
3	20,000.00	0.816	16,325.96
4	20,000.00	0.763	15,257.90
NPV of the project			(132,255.77)
Since the NPV of the project is negative, it should not be undertaken