Callaghan Company is considering investing in two new vans that are expected to
ID: 2457281 • Letter: C
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 $98,500. The expected life and salvage value of each are five years and $21,900, respectively. Callaghan has an average cost of capital of 14 percent. Calculate the net present value of the investment opportunity. (Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places.)
Explanation / Answer
Calculation of net present value of the investment opportunity:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Purchase Price of Vans
$ (98,500.00)
Cash inflows
$ 28,000.00
$ 28,000.00
$ 28,000.00
$ 28,000.00
$ 28,000.00
Salvage Value = 21900*2
$ 43,800.00
Net Cash Flows (CF)
$ (98,500.00)
$ 28,000.00
$ 28,000.00
$ 28,000.00
$ 28,000.00
$ 71,800.00
PVF (14%)
1.00000
0.87719
0.76947
0.67497
0.59208
0.51937
PV = CF *PVF
$ (98,500.00)
$ 24,561.40
$ 21,545.09
$ 18,899.20
$ 16,578.25
$ 37,290.67
Net Present Value = Sum of PVs
$ 20,374.61
Calculation of net present value of the investment opportunity:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Purchase Price of Vans
$ (98,500.00)
Cash inflows
$ 28,000.00
$ 28,000.00
$ 28,000.00
$ 28,000.00
$ 28,000.00
Salvage Value = 21900*2
$ 43,800.00
Net Cash Flows (CF)
$ (98,500.00)
$ 28,000.00
$ 28,000.00
$ 28,000.00
$ 28,000.00
$ 71,800.00
PVF (14%)
1.00000
0.87719
0.76947
0.67497
0.59208
0.51937
PV = CF *PVF
$ (98,500.00)
$ 24,561.40
$ 21,545.09
$ 18,899.20
$ 16,578.25
$ 37,290.67
Net Present Value = Sum of PVs
$ 20,374.61
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