Finch Company is considering investing in two new vans that are expected to gene
ID: 2526142 • Letter: F
Question
Finch Company is considering investing in two new vans that are expected to generate combined cash inflows of $28,000 per year. The vans’ combined purchase price is $94,000. The expected life and salvage value of each are eight years and $21,200, respectively. Finch 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
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.)
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.
Explanation / Answer
Answer
Year
Cash Inflow
PVF @12%
Present Value
1
28,000
0.8928571
25,000.00
2
28,000
0.7971939
22,321.43
3
28,000
0.7117802
19,929.85
4
28,000
0.6355181
17,794.51
5
28,000
0.5674269
15,887.95
6
28,000
0.5066311
14,185.67
7
28,000
0.4523492
12,665.78
8
70,400
(28,000 + 21,200 + 21,200)
0.4038832
28,433.38
156,218.56
Initial Cash Outflow = $94,000
Present Value of Future Cash Inflow = $156,218.56
NPV = Present Value of Future Cash Inflow - Initial Cash Outflow
= 156,218.56 - 94,000
NPV = $62,218.56
Yes, the investment should be accepted as NPV is positive and project is financially viable.
Year
Cash Inflow
PVF @12%
Present Value
1
28,000
0.8928571
25,000.00
2
28,000
0.7971939
22,321.43
3
28,000
0.7117802
19,929.85
4
28,000
0.6355181
17,794.51
5
28,000
0.5674269
15,887.95
6
28,000
0.5066311
14,185.67
7
28,000
0.4523492
12,665.78
8
70,400
(28,000 + 21,200 + 21,200)
0.4038832
28,433.38
156,218.56
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