Problem:
Marcus Carroll has decided to start a small delivery business to help support himself while attending school. Mr. Carroll expects demand for delivery services to grow steadily as customers discover their availability. Annual cash outflows are expected to increase only slightly because many of the business operating costs are fixed. Cash inflows and outflows expected from operating the delivery business are as follows:
Year of Operation Cash Inflow Cash Outflow
2006 $6,800 $3,200
2007 7,600 3,600
2008 8,400 3,840
2009 9,200 4,000
The used delivery van that Mr. Carroll plans to buy is expected to cost $13,200. It has an expected useful life of four years and a salvage value of $2,400. At the end of 2007, Mr. Carroll expects to pay additional costs of approximately $640 for maintenance and new tires. Mr. Carroll's desired rate of return is 12 percent.
(Please round computations to the nearest whole penny).
a. Calculate the net present value of the investment opportunity.
b. Indicate whether the investment opportunity is expected to earn a return above or below the desired rate of return. Should Mr. Carroll start the delivery business?