Question

The Unique Bookshelf Company is considering the purchase of a custom delivery van costing approximately $50,000. Using a discount rate of 20%, the present value of future cost savings is estimated at $51,200. To yield the 20% return, the actual cost of the van should not exceed the $50,000 estimate by more than:

Answer 1

Answer:

$1,200

Explanation:

The reason is that the net present value of the decision to buy delivery van is:

NPV = Present Value of Net Savings - Investment

Here

Present Value of Net Savings are $51,200

Investment is $50,000

By putting values in the above equation, we have:

= $51,200 - $50,000 = $1,200

This means that the cost of the van must not exceed by $1,200 at a 20% yield because it will alter the decision of purchasing the delivery van.