Reference no: EM132408512

Question

Decision making problem.

Jeff and Pam are very pleased that their business plan was successful in obtaining a loan from the bank to open their second store. They were telling Adam how they have accepted your recommendation to buy the green van even though the white van was more eco-efficient, the green van was more fit-for-purpose.

Jeff and Pam have valued your input over the last few months and they know a lot more about using financial information to reach an informed decision. So to finish off their mentoring by you they have a couple of "Adam" questions. Below are the expected 'net cashflows' from the business that they can attribute to the green van plus some other information:

Jeff & Pam use the straight-line method of depreciation and the residual value for the green van is expected zero at the end of five years. to be Expected cashflows (to the nearest 000) for the green van are:

Green Van Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Cash inflows 4,000 8,000 12,000 12,000 10,000

Cash outflows -25,000 3,000 3,300 3,700 4,100 4,600

Net cash flows -25,000 1,000 4,700 8,300 7,900 5,400

Jeff and Pam want to know:

1. How quickly will the van pay for itself? - Adam called this the payback period.

2. Using the PV table from your previous calculation question, will the van provide the 12% return they need from investing in this van - Adam called this the Net Present Value?

3. Why is it important to do different calculations?