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 $26,500 per year. The vans' combined purchase price is $94,500. The expected life and salvage value of each are six years and $20,100, respectively. Callaghan has an average cost of capital of 14 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. (Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places.) a. Net present value b-1. Indicate whether the investment opportunity is expected to earn a return that is above or below the cost of capital. Above Below b-2. Based on your answer in Requirement b-1, should the investment opportunity be accepted. Accepted Rejected

Explanation / Answer

Cash inflows 26500 Purchase price 94500 Salvage value 40200 PVAF(14%,6yrs) 3.88866 PV of inflow    103,049.49 PVIF 0.45558 PV of salvage value 18314.316 Total PV of cash inflow    121,363.81 a)NPV      26,863.81 b-1) Above as NPV is positive b-2) accepted

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