The Jones Family, Incorporated

Topics: Net present value, Investment, Capital accumulation Pages: 2 (321 words) Published: April 21, 2013
THE JONES FAMILY, INCORPORATED

Principles of Corporate Finance
6th Edition

Richard A. Brealey and Stewart C. Myers

The accompanying table summarizes Johnny's NPV calculation. He assumed Marsha would take 25 100-mile trips per year, saving $200, plus $1.00 per mile, plus a $40 tip on every trip. Operating costs would be $.45 per mile. The net savings are $295 per trip and $7375 per year. These savings increase with inflation at an assumed rate of 4% per year.

It seems that Marsha's horse transporter was a good buy after all: NPV is positive (+ $14,325). MINICASE SOLUTIONS

THE JONES FAMILY'S HORSE TRANSPORTER

|Year |0 |1 |2 |3 |4 |5 |6 |7 |8 | |1. Investment (plus ending value in | | | | | | | | | | |year 8) |-35,000 | | | | | | | |+15,000 | |2. Insurancea |-1,200 |-1,200 |-1,200 |-1,200 |-1,200 |-1,200 |-1,200 |-1,200 | | |3. Net savings vs. rented | | | | | | | | | | |transporterb | |+7,375 |+7,375 |+7,375 |+7,375 |+7,375 |+7,375 |+7,375 |+7,375 | | | | | | | | | | | | |4. Cash flow |-36,200 |+6,175...
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