Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $50,000....

Free

80.2K

Verified Solution

Question

Finance

Marsha Jones has bought a used Mercedes horse transporter forher Connecticut estate. It cost $50,000. The object is to save onhorse transporter rentals.
Marsha had been renting a transporter every other week for $215per week plus $1.75 per mile. Most of the trips are 90 miles intotal. Marsha usually gives the driver a $40 tip. With the newtransporter she will only have to pay for diesel fuel andmaintenance, at about $.60 per mile. Insurance costs for Marsha’stransporter are $1,950 per year.
The transporter will probably be worth $30,000 (in real terms)after eight years, when Marsha’s horse Nike will be ready toretire. Assume a nominal discount rate of 7% and a forecastedinflation rate of 3%. 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.)
NPV = $ ________

Answer & Explanation Solved by verified expert

3.6 Ratings (279 Votes)

	Transporter		Rental
Rent/week (a)	215	Number of trips/year (a)	26
Weeks rented (b)	26	Miles/trip (b)	90
Total rent (c = a*b)	5,590	Total miles (c = a*b)	2,340
Miles/trip (d)	90	Price/mile (d)	0.60
Price/mile ('e)	1.75	Total price (e = c*d)	1,404
Total price (f = bde)	4,095	Insurance cost (f)	1,950
Tip/trip (g)	40
Total tips (h = g*b)	1,040
Total cost (I = c+f+h)	10,725	Total cost (G = e+f)	3354
Net savings (I-G)	7,371

Real discount rate d = (n-i)/(1+i) where n = nominal discount rate and i = forecasted inflation

d = (7%-3%)/(1+3%) = 3.88%

Formula	Initial investment (II)	(50,000)
	Life (N)	8
	Salvage value (SV)	30,000
	Discount factor (D)	3.88%
	PMT	7,371
PV(D,N,PMT)	PV of PMT (a)	49,867
PV(D,N,0,FV)	PV of salvage value (b)	22,118
(II + a + b)	NPV	21,985

NPV of the investment = 21,985

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Marsha Jones has bought a used Mercedes horse transporter forher Connecticut estate. It cost $50,000. The object is to save onhorse transporter rentals.Marsha had been renting a transporter every other week for $215per week plus $1.75 per mile. Most of the trips are 90 miles intotal. Marsha usually gives the driver a $40 tip. With the newtransporter she will only have to pay for diesel fuel andmaintenance, at about $.60 per mile. Insurance costs for Marsha’stransporter are $1,950 per year.The transporter will probably be worth $30,000 (in real terms)after eight years, when Marsha’s horse Nike will be ready toretire. Assume a nominal discount rate of 7% and a forecastedinflation rate of 3%. 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.)NPV = $ ________