The Jones Family, Incorporated

THE JONES FAMILY, integrate Principles of Corporate Finance 6th Edition Richard A. Brealey and Stewart C. Myers The accompanying table summarizes Johnnys NPV calculation. He assumed Marsha would take 25 100-mile trips per year, saving $cc, plus $1. 00 per mile, plus a $40 tip on every trip. Operating cost would be $. 45 per mile. The net nest egg are $295 per trip and $7375 per year.These savings increase with inflation at an assumed rate of 4% per year. It seems that Marshas horse transporter was a good buy after any NPV is positive (+ $14,325). MINICASE SOLUTIONS THE JONES FAMILYS 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 +6,175 +6,175 +6,175 +6,175 +6,175 +6,175 +21,175 5. familiarized fo r 4% inflationc -36,200 +6,422 +6,679 +6,946 +7,224 +7,513 +7,813 +8,126 +28,979 6.Present valued -36,200 +5,892 +5,622 +5,364 +5,118 +4,883 +4,658 +4,445 +14,543 NPV = + 14,325 a Paid at start of year. b Savings per 100-mile trip 200 + 100 (1. 00 . 45) + 40 = $295. For 25 trips per year, annual savings are 295 x 25 = $7375. Here the savings are entered at end of year (or start of the next year). This understates their value the Jones family would actually begin to proceed right away. c Savings increase by 4% per year. Year 8 cash inflows from draw off 4 are multiplied by (1. 04)8. d Line 5 discounted at 9%.