You see an ad in the paper for a used bus. You figure you could use the bus to ferry students to and from Cleveland each weekend for the next five years. Your analysis indicated that there would be sufficient demand from the students 30 weekends per year. In fact, you are pretty sure that you could sell 60 round-trip tickets for $90 each on the 30 weekends. You would pay the driver $600 per weekend that she drove. Gas and maintenance would run $400 per weekend. You found a travel agency who would handle selling tickets and overseeing the operations for 20% of the gross sales. All other expenses (insurance and so forth) would run $300 per weekend of use. You estimate that you could sell the bus in 5 years for $200,000. The expenses and revenues would be the same for each of the five years. Ignore taxes for this problem.
1) How much are the annual net cash flows?
A) $162,000
B) $99,600
C) $120,000
D) $90,600
E) None of the above
2) For the bus problem – assume the cash flow you figured was $90,000 per year, if you wanted to earn 20% on your investment, how much would you pay for the bus today?
A) $269,195,289
B) $329,436.73
C) $432,986.11
D) $349,530.61
E) None of these is close
3) If the net present value of a project is positive, which of the following it true
A) The project will earn more than the required rate of return
B) The project will earn less than the required rate of return
C) The project is more risky than similar projects with a lower payback
D) The net present value of the project is equal to its discounted cash flow
E) The project should be rejected.