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:

Given that

Purchase of a customer delivery van = $50,000

discount rate = 20%

Present value of future cost savings = $51,200

Yield = 20%

Based on the above information, as per the net present value the initial cost of the equipment should not be more than the present value of cash inflows  i.e. $51,200

So the more than amount is

= $51,200 - $50,000

= $1,200

Answer 2

The present value is the monetary value of the future cash inflows or outflows. It is determined based upon the differences in the discount rates in the future that is estimated as per the current growth rates.

If the company wants to yield a 20% return then the actual cost must not be estimated at more than $1,200.

Computation:

GIven,

Purchase cost =$50,000

Discount rate and yield rate =20%

Present value of future cost savings =$51,200

$\rm{Exceeding\; Amount}=Present\;Value-Purchase\;Cost\\\\=\ 51,200-\ 50,000\\\\=\ 1,200$

As per the net present value of the van, the initial cost that is the purchase price of the van should not be more than the present value of the future cost savings or the present value of the future cash inflows.

In this case, the present value of $50,000 cannot exceed this limit.

Therefore, in this case, the exceeding amount is $1,200.

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