Callaghan Company is considering investing in two new vans that are expected to

Question

Callaghan Company is considering investing in two new vans that are expected to generate combined cash inflows of $28,000 per year. The vans' combined purchase price is $91,000. The expected life and salvage value of each are four years and $21,000, respectively. Callaghan has an average cost of capital of 7 percent.
Round figures to two decimal points.

1) Calculate the net present value of the investment opportunity.

2) 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.

Please show work so I can understand how this problem is to be worked out-- thank you!

Explanation / Answer

Conclusion:-Since the NPV is Positive and it is above the cost of capital,the project should be accepted.

Net Present value of the Investment(Amount in $) Year Particulars cash Flow Present value factor@7% Net Present Value 1-4 A)Cash Inflow from the Project during the year 28,000 3.3872 94,841.92 0 B)Less:-Cash Outflow 91,000 1 (91,000) 4 C)Salvage Value during the Year 21,000 0.7629 16020.80 Net Present Value 19,862.72

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