Gainesville Bus Lines (GBL) is considering two alternative busses to
transport people from the commuter lot to the main campus. Bus S has a
cost of $50,000 and will produce end-of-year net cash flows of $25,000
per year for 3 years. Bus L will cost $75,000 and will produce cash
flows of $23,000 per year for the next 6 years. The company must
provide bus service for 6 years, after which it plans to give up its
franchise and to cease operating the route. Inflation is not expected
to affect either costs or revenues during the next 6 years. If GBL’s
cost of capital is 15 percent, by what amount will the better project
change the company’s value?





0 	0% 	A . 	$10,225.18
0 	0% 	B . 	$11,736.26
0 	0% 	C . 	$12,043.10 
0 	0% 	D . 	$13,424.66
0 	0% 	E . 	$14,081.19

jucylove -

The correct answer should be C, $12,043.10

Here's my spreadsheet calc -

Bus S	 0	1	2	3	4	5	6
cost	-50000			-50000			
Net CF	       25000	25000	25000	25000	25000	25000
							
Discount
factor @ 15%   0.869	0.756	0.657	0.571	0.497	0.432
Discounted 
CF	-50000	21739	18903	-16437	14293   12429	10808							
Summary	-50000	21739	18903	-16437	14293   12429	10808		
NPV S	11736.25573						
							
							
Bus L	0	1	2	3	4	5	6
cost	-75000						
Net CF		23000	23000	23000	23000	23000	23000
							
Discount
factor @ 15%	0.869	0.756	0.657	0.571	0.497	0.432
Discounted
CF	-75000	20000	17391	15122	13150	11435	9943
							
Summary	-75000	20000	17391	15122	13150	11435	9943

NPV L	12043.10196						

Jucy - thanks so much for the tips!
Oh, and if you really love me - give me 5 stars? Please? ;-)

ragingacademic

Thanks!  I am still checking on the data for the other one.  Relax we
still have plenty of time.