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Alternative investment options

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Nowhere Bus Lines (NBL) is considering two alternative buses to transport people from the commuter lot to the main campus. Bus S has a cost of $50,000 and will produce end-of-year net cash flows of $25,000 per year for 3 years. Bus L will cost $75,000 and will produce cash flows of $23,000 per year for the next 6 years. The company must provide bus service for 6 years, after which it plans to give up its franchise and to cease operating the route. Inflation is not expected to affect either costs or revenues during the next 6 years. If NBL's cost of capital is 15 percent, by what amount will the better project change the company's value?

a. $10,225.18
b. $11,736.26
c. $12,043.10
d. $13,424.66

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This solution evaluates alternative investment options.

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Answer: C

The cash flow for Bus S will be as follows:
Year Cash flow
0 -50,000
1 25,000
2 25,000
3 -25,000 25,000 (from operations) - 50,000 (purchase of bus)
4 25,000
5 ...

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