Problem -
Brett Dunlop is seeking part-time employment while he attends school. He is considering purchasing technical equipment that will enable him to start a small training services company that will offer tutorial services over the Internet. Brett expects demand for the service to grow rapidly in the first two years of operation as customers learn about the availability of the Internet assistance. Thereafter, he expects demand to stabilize. The following table presents the expected cash flows.
Year of Operation Cash Inflow Cash Outflow
2015 $16,000 $10,000
2016 20,000 12,000
2017 21,000 12,600
2018 21,000 12,600
In addition to these cash flows, Mr. Dunlop expects to pay $21,000 for the equipment at the beginning of 2015.
He also expects to pay $3,600 for a major overhaul and updating of the equipment at the end of the second year of operation.
The equipment is expected to have a $1,500 salvage value at the end of 2018.
Mr. Dunlop desires to earn a rate of return of 8 percent.
Round your computations to two decimal points.
Calculate the net present value of the investment opportunity.