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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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    Solution Preview

    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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    This solution evaluates alternative investment options.

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