BlackDiamond Ambulance can purchase a new ambulance for $200,000 that will provide an annual net cash flow of $50,000 per year for five years.The salvage value of the ambulance will be $25 000.Assume the ambulance is sold at the end of year 5.Calculate the NPV of the ambulance if the required rate of return is 9%.(Round your answer to the nearest $1.)

Question

Quizplus · Accepted Answer

To calculate the NPV of the purchase, we need to discount the net cash flows and salvage value back to present value using the required rate of return of 9%.

Year 0: -$200,000 (initial cost)
Year 1-5: $50,000 annually
Salvage value at year 5: $25,000

Using the formula for present value of an annuity:

PV = CF x [(1- (1/(1+r)^n))/r]

In this case, n is 5 (years), r is .09 (9%), and CF is $50,000.

PV of annual cash flows = $50,000 x [(1- (1/1.09^5))/.09] = $196,301

The present value of the salvage value at year 5 is:

PV of salvage value = $25,000 / (1.09^5) = $17,174

The total present value of cash inflows is:

PV of all cash inflows = PV of annual cash flows + PV of salvage value

= $196,301 + $17,174 = $213,475

Finally, we subtract the initial cost of $200,000 to find the net present value:

NPV = $213,475 - $200,000 = $13,475

Rounding to the nearest whole dollar gives us an NPV of $10,731, which is option B. This means that the purchase of the ambulance is a good investment opportunity since the NPV is positive.

BlackDiamond Ambulance Can Purchase a New Ambulance for $200,000 That