Determining the net present value Howard Parmer has decided to start a small delivery business to help support himself while attending school. Mr. Parmer expects demand for delivery services to grow steadily as customers discover their availability. Annual cash outflows are expected to increase only slightly because many of the business operating costs are fixed. Cash inflows and outflows expected from operating the delivery business follow:
The used delivery van Mr. Parmer plans to buy is expected to cost $13,200. It has an expected useful life of four years and a salvage value of $2,400. At the end of 2013, Mr. Parmer expects to pay additional costs of approximately $540 for maintenance and new tires. Mr. Parmerâs desired rate of return is 12 percent.
Required (Round computations to the nearest whole penny.)
a. Calculate the net present value of the investment opportunity.
b. Indicate whether the investment opportunity is expected to earn a return above or below the desired rate of return. Should Mr. Parmer start the delivery business?