Parkway Car can purchase a new vehicle for $200,000 that will provide annual net cash flow over the next five years of $40,000, $45,000, $50,000, $55,000 and $60,000.The salvage value of the vehicle will be $25,000.Assume that the vehicle 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.)

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Quizplus · Accepted Answer

The NPV is calculated as the present value of the future cash flows minus the initial investment. The present value of the future cash flows is calculated as the sum of the present values of each individual cash flow. The present value of each individual cash flow is calculated as the cash flow multiplied by the discount factor. The discount factor is calculated as 1 / (1 + r)^n, where r is the required rate of return and n is the number of years until the cash flow is received.In this case, the required rate of return is 9% and the cash flows are received over the next five years. The present value of the future cash flows is calculated as follows:PV = $40,000 / (1 + 0.09)^1 + $45,000 / (1 + 0.09)^2 + $50,000 / (1 + 0.09)^3 + $55,000 / (1 + 0.09)^4 + $60,000 / (1 + 0.09)^5 + $25,000 / (1 + 0.09)^5PV = $40,000 / 1.09 + $45,000 / 1.1881 + $50,000 / 1.2950 + $55,000 / 1.4116 + $60,000 / 1.5386 + $25,000 / 1.5386PV = $36,697 + $37,894 + $38,603 + $38,971 + $39,029 + $16,253PV = $207,447The NPV is calculated as the present value of the future cash flows minus the initial investment. In this case, the initial investment is $200,000. The NPV is calculated as follows:NPV = PV - Initial InvestmentNPV = $207,447 - $200,000NPV = $7,447The NPV is $7,447. The closest answer choice is A) $7390.

Parkway Car Can Purchase a New Vehicle for $200,000 That