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 $30,500 per year. The vans’ combined purchase price is $96,500. The expected life and salvage value of each are eight years and $20,200, 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.)

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.)

Callaghan Company is considering investing in two new vans that are expected to generate combined cash inflows of $30,500 per year. The vans’ combined purchase price is $96,500. The expected life and salvage value of each are eight years and $20,200, 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.)

Explanation / Answer

NPV of investment opportunity = P.V. of cash inflow - P.V. of cash outflow

   P.V. of cash inflow:-

   Year 1 - 8 = Cumulative PV Factor @ 14% for 8 Years = 4.639

Total P.V. of cash inflow = 4.638864 * 30500 = $ 141485.352 (approx)

P.V. of Terminal value of cash inflow at end of 8TH Year = 0.350559 * 20200 = $ 7081.2918

   Total P.V. of Cash inflow = 141485.352 + 7081.2918 = $ 148566.6438

NPV of investment opportunity = 148566.6438 - 96500

   = $ 52066.64 (approx)

NOTE:- Assuming the effect of depreciation already given while calculating cash inflow, so no need to separately consider the depreciation point now.

Conclusion:- NPV of investment opportunity = $ 52066.64 (approx)

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