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 $34,000 per year. The vans’ combined purchase price is $99,000. The expected life and salvage value of each are six years and $20,300, respectively. Callaghan has an average cost of capital of 14 percent. (PV of $1 and PVA of $1)

Calculate the net present value of the investment opportunity.

Based on your answer in Requirement a, should the investment opportunity be accepted.

Callaghan Company is considering investing in two new vans that are expected to generate combined cash inflows of $34,000 per year. The vans’ combined purchase price is $99,000. The expected life and salvage value of each are six years and $20,300, respectively. Callaghan has an average cost of capital of 14 percent. (PV of $1 and PVA of $1)

Calculate the net present value of the investment opportunity.

Based on your answer in Requirement a, should the investment opportunity be accepted.

Explanation / Answer

Salvage value is considered to be the combined value of the two vans.

Compute the NPV of the Project. Year Cash Flows Discount @14% Present value of cash flows 0 -99000 1 -99000 1 34000 0.877192982 29824.5614 2 34000 0.769467528 26161.89597 3 34000 0.674971516 22949.03155 4 34000 0.592080277 20130.72943 5 34000 0.519368664 17658.53459 6 34000 0.455586548 15489.94262 6 20300 0.399637323 8112.637647 Net present value 41327.33321 Conclusion: The net present value is positive and hence the project should be accepted. Note:

Salvage value is considered to be the combined value of the two vans.

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