Monterey Company is considering investing in two new vans that are expected to g
ID: 2581978 • 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. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Required
Calculate the net present value of the investment opportunity. (Round your intermediate calculations and final answer to 2 decimal places.)
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 capital? Above Should the investment opportuntity be accepted? AcceptExplanation / Answer
Calculation of net present value of the investment:
Present value of cash inflow for 4 year = $30,000 x Cumulative present value of $1 per annum @7%
= $30,000 x 3.387
= $101,610
Add: Present value of salvage value = $23,000 x Present value of $1 @7%
= $46,000 x 0.763
= $35,098
Total Present value of Cash Inflow = $136,708
Less: Present value of cash outflow = $93,000
Net Present Value = $40,708
This investment opportunity is expected to earn a return that is above the cost of capital and it should be accepted because it has positive Net Present Value.