Jerome operates a car repair shop and is considering whether to purchase a computer diagnostic tool for Korean automobiles. The tool, which costs $4,000, will enable Jerome to service Korean automobiles. This added business will give Jerome additional income of $2,000 in each of the next three years. The net present value of the tool at 5.5% is $____.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows to their present value and subtracting the initial investment. The formula for NPV is: NPV = (Cash Flow / (1 + r)^n) - Initial Investment, where r is the discount rate and n is the period. For Jerome's case, the cash flows are $2,000 for each of the next three years, and the discount rate is 5.5%. Calculating the present value of each cash flow and summing them up gives us the total present value of the cash flows. Subtracting the initial investment of $4,000 from this sum gives the NPV. The correct NPV, using the given discount rate and cash flows, is $1,395.87.

Jerome Operates a Car Repair Shop and Is Considering Whether