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Marsha Jones has bought a used Mercedes horse transporter for her Connecticut estate. It cost $35,000. The object is to save on horse transporter rentals.
Marsha had been renting a transporter every other week for $200 per day plus $1.00 per mile. Most of the trips are 80 or 100 miles in total. Marsha usually gives the driver a $40 tip. With the new transporter she will only have to pay for diesel fuel and maintenance, at about $.45 per mile. Insurance costs for Marsha’s transporter are $1,200 per year.
The transporter will probably be worth $15,000 (in real terms) after eight years, when Marsha’s horse Nike will be ready to retire. Is the transporter a positive-NPV investment? Assume a nominal discount rate of 9% and a 3% forecasted inflation rate. Marsha’s transporter is a personal outlay, not a business or financial investment, so taxes can be ignored.
| Â |
2009 |
2010 |
2011 |
2012-2019 |
|
1. Capital expenditure |
-10,400 |
 |  |  |
|
2. Research and development |
-2,000 |
 |  |  |
|
3. Working capital |
-4,000 |
 |  |  |
|
4. Revenue |
 |
8,000 |
16,000 |
40,000 |
|
5. Operating costs |
 |
-4,000 |
-8,000 |
-20,000 |
|
6. Overhead |
 |
-800 |
-1,600 |
-4,000 |
|
7. Depreciation |
 |
-1,040 |
-1,040 |
-1,040 |
|
8. Interest |
 |
-2,160 |
-2,160 |
-2,160 |
|
9. Income |
-2,000 |
0 |
3,200 |
12,800 |
|
10. Tax |
0 |
0 |
420 |
4,480 |
|
11. Net cash flow |
-16,400 |
0 |
2,780 |
8,320 |
|
12. Net present value = + 13,932 |
 |  |  |  |