The Jones Family, Incorporated

THE JONES FAMILY, INCORPORATED Principles of Corporate Finance 6th Edition Richard A. Brealey and Stewart C. Myers The accompanying table summarizes Johnny’s NPV calculation. He assumed Marsha would take 25 100-mile trips per year, saving $200, plus $1. 00 per mile, plus a $40 tip on every trip. Operating costs would be $. 45 per mile. The net savings are $295 per trip and $7375 per year.
These savings increase with inflation at an assumed rate of 4% per year. It seems that Marsha’s horse transporter was a good buy after all: NPV is positive (+ $14,325). MINICASE SOLUTIONS THE JONES FAMILY’S 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. Adjusted for 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 save right away. c Savings increase by 4% per year. Year 8 cash inflows from line 4 are multiplied by (1. 04)8. d Line 5 discounted at 9%.
Approximate price: $22
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