Reference no: EM133117202
Question - The directors of Shenzhen Rail Ltd are considering the purchase of a new high-speed train. The details of the proposal are as follows:
Cost: $6,000,000.
Additional revenues generated per year: $1,500,000
Additional operating and maintenance costs per year: $260,000
Required rate of return: 12 per cent
(All cash flows occur at the end of each year)
The company has a policy of keeping its trains for only four years. Consistent with this policy, if the new train is purchased it will be traded-in on a new train after four years. At that time the train is expected to have a trade-in value of $1,500,000
Required -
(a) Calculate the net present value for the proposed purchase of a new high-speed train and specify whether the project is acceptable.
(b) Explain how money is said to have a 'time value'.