Perez Company is considering investing in two new vans that are expected to gene

Question

Perez Company is considering investing in two new vans that are expected to generate combined cash inflows of $31,000 per year. The vans' combined purchase price is $90,500. The expected life and salvage value of each are five years and $20,700, respectively. Perez has an average cost of capital of 12 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 your intermediate calculations and final answer to 2 decimal places.) b. Indicate whether the investment opportunity is expected to earn a return that is above or below the cost of capital and whether it should be accepted. a. Net present value b. Will the return be above or below the cost of capital? Should the investment opportunity be accepted?

Explanation / Answer

A Calculation of Net Present Value: Year Cash Flows Discount Factor @ 12% Present Value 0 -90500 1.00 -90,500 1 31000 0.89 27,679 2 31000 0.80 24,713 3 31000 0.71 22,065 4 31000 0.64 19,701 5 31000+20700 0.57 29,336 NPV: 32,994 B Since NPV is Positive by high margins at 12%, Return Should be above cost of Capital C Since NPV is Positive , Proposal should be accepted.

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