Monterey Company is considering investing in two new vans that are expected to g
ID: 2559503 • Letter: M
Question
Monterey Company is considering investing in two new vans that are expected to generate combined cash inflows of $30,000 per year. The vans' combined purchase price is $93,000. The expected life and salvage value of each are four years and $23,000, respectively. Monterey has an average cost of capital of 7 percent. (P of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. Calculate the net present value of the investment opportunity. (Round your intermediate calculations and final answer to 2 decimal places.) b. Indicate whether the investment opportunity is expected to earn a return that is above or below the cost of capital and whether it should be accepted. a. Net present value b. Will the return be above or below the cost of capital? Above Should the investment opportunity be accepted? AcceptedExplanation / Answer
Initial Combined Cash Outflow = $93,000
Combined Cash inflow = $30,000
Useful life = 4 Years
Cost of Capital = 7%
.Present Value Factor @7% for 4th Year = 0.7629
Present Value Annuity Factor @7% for 4 Years = 3.38721
It is mentioned in the question that each machine can be sold for $23,000 at the end of 4 years, so at the end of 4 years company will get $46,000 ($23,000*2).
Present Value of Cash Inflows = Cash Inflow * PVAF@7% for 4 Years + Salvage Value*PVF@7% for 4th year
= ($30,000 * 3.3872) + ($46,000 * 0.7629)
= 101,616 + 35,093.4
= 136,709.4
NPV = Present Value of Cash Inflows – Initial Cash Outflow
= $136,709.4- $93,000
NPV = $43,709.4
Yes the company will earn the above expected rate as the NPV is positive and the decision is Financially Viable.
Yes the company should Invest in the given proposal.