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 $92,500. The expected life and salvage value of each are six years and $21,900, respectively. Callaghan has an average cost of capital of 16 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required a. 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.) b. Based on your answer in Requirement a, should the investment opportunity be accepted

Explanation / Answer

a..

Cash inflow for 1 to 6 years=34000

Additional cash flow in 6th year is the salvage value of 2 vans =21900+21900=43800

Npv

=(-92500)+34000[(1-(1+.16)^-6)/.16]+43800(1+.16)^-6

=-92500+34000(3.6847)+43800(.4104)

=50758.39

b.

Yes, accept the project because it has positive NPV

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