Question

Suppose you are considering becoming a driver for Uver, a new ride service in your town. You estimate you can buy a car that will be of acceptable Uver standards with $27,000.00 that you saved up. The car is electric, and with free charging stations all over town, you do not have any expenses for using the car. You expect that the car will be useful as an Uver car for the next 3 years. After the 3 years, the battery will be depleted, so the car will not be worth much anymore. The car therefore will not have any residual value after 3 years. You expect to make $15,000.00 per year as an Uver driver. Uver, however, has an odd business model: they pay their drivers at the end of the year. Therefore, while you will spend the $27,000.00 on the car today, you will receive your first $15,000.00 1 year from now, the next $15,000.00 a year after that, and the last $15,000.00 1 year after that.

Suppose the interest rate is 19.00%. The net present value of becoming an Uver driver is ___________.
Suppose the interest rate were instead 33%. You would_______ .

Answer 1

• Interest rate 19% = $5,098.75
• Interest rate 33% = -$866.13

Step-by-step explanation:

Net present value is the present value of future cashflows less the investment spent on the project.

Net Present value assuming a rate of 19%:

= -27,000 + (15,000 / ( 1 + 19%)) + (15,000 / ( 1 + 19%)²) + (15,000 / ( 1 + 19%)³)

= $5,098.75

Net Present value assuming a rate of 33%:

= -27,000 + (15,000 / ( 1 + 33%)) + (15,000 / ( 1 + 33%)²) + (15,000 / ( 1 + 33%)³)

= -$866.13