Central Mass Ambulance Service 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 NPV, we need to discount all the cash flows to present value using the required rate of return of 9%.
Initial investment = -$200,000
Net cash flow for each year = $50,000
Salvage value = $25,000
Discount factor for 5 years at 9% = 3.8897

NPV = -$200,000 + ($50,000 / 3.8897) + ($50,000 / (3.8897^2)) + ($50,000 / (3.8897^3)) + ($50,000 / (3.8897^4)) + (($25,000 + $50,000) / (3.8897^5))
NPV = -$200,000 + $12,858 + $14,096 + $15,412 + $16,817 + $36,333
NPV = $10,731

Based on the positive NPV, it is recommended that Central Mass Ambulance Service purchase the new ambulance.

Central Mass Ambulance Service Can Purchase a New Ambulance for $200,000