The following table shows the receipts and disbursements for

The following table shows the receipts and disbursements for a given venture. Determine the present worth of the receipts and disbursements of the venture for a 15% interest rate. Is the venture profitable? Transco plans on purchasing a bus for $75,000 that will have a capacity of 40 passengers. As an alternative, a larger bus can be purchased for $95,000 that will have a capacity of 50 passengers. The salvage value of either bus is estimated to be $8,000 after a 10-year life. If the annual net profit of $400 can be realized per passenger, which alternative should be recommended using a management- suggested interest rate of 15%? Using the actual cost of money at 7%?

Solution

solution of problem 5:

given that certain venture has cash inflows or receipt as 0,6000,5000,5000,12000 and cash outflow or cash disbursement as 20000,0,4000,0,1000 for 4 years respectively.

1) hence net present value of money is given as follows

NPV=sum (CFinflow/(1+r)^t)-sum (CFoutflow/(1+r)^t)

interestrate=15 %=r=.15

NPV=(0/1.15^0)+(6000/1.15^1)+(5000/1.15^2)+(5000/1.15^3)+(12000/1.15^4)-(20000/1.15^0)-(0/1.15^1)-(4000/1.15^2)-(0/1.15^3)-(1000/1.15^4)=-4449.60 Rs

2)as NPV of money is negative means this venture is not profitable