Maxwell Bus Lines is considering the purchase of a new bus. It will cost $120,000 now and will require major maintenance expenditures of $30,000 after 5 years and 10 years. The bus will increase profit of $35,000 at the end of every year for 14 years at which time it will also have a salvage value of $10,000. Maxwell's cost of capital is 17% (compounded annually). What is the Net Present Value of this expenditure?

Question

Quizplus · Accepted Answer

The Net Present Value (NPV) calculation involves discounting all cash flows (both inflows and outflows) to their present value using the cost of capital (17% in this case). The formula for NPV is: NPV = (Cash inflows/outflows) / (1 + r)^n, where r is the discount rate (cost of capital) and n is the number of periods. The calculation includes the initial cost of the bus, the maintenance costs at years 5 and 10, the annual profit for 14 years, and the salvage value at the end of year 14. The correct NPV calculation with these inputs results in an NPV of $44,211, making option B the correct choice.

Maxwell Bus Lines Is Considering the Purchase of a New