Aaron Heath is seeking part-time employment while he attendsschool. He is considering purchasing technical equipment that willenable him to start a small training services company that willoffer tutorial services over the Internet. Aaron expects demand forthe service to grow rapidly in the first two years of operation ascustomers learn about the availability of the Internet assistance.Thereafter, he expects demand to stabilize. The following tablepresents the expected cash flows:
| Year of | | |
| Operation | Cash Inflow | Cash Outflow |
| 2019 | $ | 14,000 | | $ | 9,800 | |
| 2020 | | 18,500 | | | 11,900 | |
| 2021 | | 21,500 | | | 13,100 | |
| 2022 | | 21,500 | | | 13,100 | |
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In addition to these cash flows, Aaron expects to pay $21,300for the equipment. He also expects to pay $3,200 for a majoroverhaul and updating of the equipment at the end of the secondyear of operation. The equipment is expected to have a $1,300salvage value and a four year useful life. Aaron desires to earn arate of return of 9 percent. (PV of $1 and PVA of $1) (Useappropriate factor(s) from the tables provided.)
Required
Calculate the net present value of the investment opportunity.(Negative amount should be indicated by a minussign. Round intermediate calculations and finalanswer to 2 decimal places.)
Indicate whether the investment opportunity is expected to earna return that is above or below the desired rate of return andwhether it should be accepted.
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| | | a. | Net present value | | | b. | Will the return be above or below thecost of capital? | | | Should the investmentopportunity be accepted? |
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