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Harry Smith is considering the purchase of a red van for use in shuttling people to a local airport

Harry Smith is considering the purchase of a red van for use in shuttling people to a local airport. The van will cost $40,000 and is expected to last 5 years. He expects to sell the van at the end of year 5 for $6,000. After paying wages to drivers, taxes, fees, gasoline, maintenance and other costs, he expects the following cash inflows: Year 1 $4,000, Year 2 $8,000, year 3 $12,000, year 4 $16,000 and year 5 $6,000. The total cash inflow in year 5 is expected to be $12,000, ($6,000 from the operation of the van and $6,000 from the sale of the van.)
a. If the appropriate required rate of return is 8%, what is the net present value using an excel function and should he make the investment?
b. If Mr. Smith's business grows to where the free cash flow becomes $600,000 per year in 2012, what is the value of that business? Assume that cash flow is expected to grow at 2% per year for the future. What information do you need that is not given? What is a reasonable estimate for the missing information? Please explain why you made your choice.
c. If Mr. Smith decides to implement a Balanced Scorecard, choose 2 metrics and explain how you would measure these metrics

Solution Summary

The expert examines Harry Smith for considering purchasing a red van to shuttle people. What is reasonable to estimate for the missing information is discussed.

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