Monterey Company is considering investing in two new vans that are expected to g
ID: 2588726 • 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.
Explanation / Answer
CASH INFLOW 30000 TIME PERIOD 4 PV $1 i=7% N 4 3.38721 NET PRESENT VALUE OF 30000 101616.3 SALVAGE VALUE 23000 TIME PERIOD 4 NPV $1 i=7% N 4 0.7629 NET PRESENT VALUE OF 23000 17546.7 COMBINED CASH INFLOW 119163 COMBINED PURCHASE PRICE 93000 NET CASH INFLOW 26163 INVESTMENT OPPORTUNITY SHOULD BE ACCEPTED AS PRESENT VALUE GIVES RETURN OF 26163$ AFTER WEAR AND TEAR AND ANNUAL CASH INFLOW