Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $36,000....

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Marsha Jones has bought a used Mercedes horse transporter forher Connecticut estate. It cost $36,000. The object is to save onhorse transporter rentals.
Marsha had been renting a transporter every other week for $201per week plus $1.05 per mile. Most of the trips are 90 miles intotal. Marsha usually gives the driver a $45 tip. With the newtransporter she will only have to pay for diesel fuel andmaintenance, at about $.46 per mile. Insurance costs for Marsha’stransporter are $1,250 per year.
The transporter will probably be worth $16,000 (in real terms)after eight years, when Marsha’s horse Nike will be ready toretire. Assume a nominal discount rate of 10% and a forecastedinflation rate of 4%. Marsha’s transporter is a personal outlay,not a business or financial investment, so taxes can be ignored.Hint: All numbers given in the questions are in realterms. Assume CF at end of year, for simplicity.
Calculate the NPV of the investment. (Do not roundintermediate calculations. Round your answer to the nearest wholedollar amount.)

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3.6 Ratings (366 Votes)

(1+Dnominal) = (1+Dreal)*(1+Inflation)

Dreal = (1+Dnominal)/(1+inflation) - 1

= (1+10%)/(1+4%) - 1 = 5.77%

Calculation of savings:

	Savings:	Rental		Transporter
	Rent per week ('r)	201
	Miles in one trip (n)	90	Miles in one trip (n)	90
	Cost/mile ('c)	1.05	Cost/mile ('c)	0
(n*c)	Total miles cost (T)	95	Total miles cost (T)	41
(T+r)	Total cost per trip (TC)	296	Cost/year (TC) (T*26)	1,076
	Number of weeks hired (N)	26	Insurance/year (I)	1,250
(TC*N)	Total annual cost	7,683	Total annual cost (TC+I)	2,326
	Net savings	5,357

Calculation of incremental NPV of buying the transporter:

	Discount rate	5.77%
	Life (n)	8
	Initial investment (a)	(36,000)
	Annual savings (b)	5,357
b*((1-(1+Dr)^-n)/Dr	PV of annual savings ('c)	33,569
	Salvage value (d)	16,000
d/(1+Dr)^n	PV of salvage ('e)	10,215
(a+c+e)	NPV	7,784

Thus, NPV of buying the transporter is $7,784.

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Transcribed Image Text

Marsha Jones has bought a used Mercedes horse transporter forher Connecticut estate. It cost $36,000. The object is to save onhorse transporter rentals.Marsha had been renting a transporter every other week for $201per week plus $1.05 per mile. Most of the trips are 90 miles intotal. Marsha usually gives the driver a $45 tip. With the newtransporter she will only have to pay for diesel fuel andmaintenance, at about $.46 per mile. Insurance costs for Marsha’stransporter are $1,250 per year.The transporter will probably be worth $16,000 (in real terms)after eight years, when Marsha’s horse Nike will be ready toretire. Assume a nominal discount rate of 10% and a forecastedinflation rate of 4%. Marsha’s transporter is a personal outlay,not a business or financial investment, so taxes can be ignored.Hint: All numbers given in the questions are in realterms. Assume CF at end of year, for simplicity.Calculate the NPV of the investment. (Do not roundintermediate calculations. Round your answer to the nearest wholedollar amount.)