Exercise 16-5 Determining net present value LO 16-2 Callaghan Company is conside

Question

Exercise 16-5 Determining net present value LO 16-2 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 $96,000. The expected life and salvage value of each are four years and $20,900, respectively. Callaghan has an average cost of capital of 14 percent (PV of $1 and PVA of $1) (Use appropriate factorfs) 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-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 0 Accepted O Rejected Achamomile-roman jpg A images (24pg 149 jpg ^ ; Type here to search

Explanation / Answer

Statement showing Cash flows Particulars Time PVf 14% Amount PV Cash Outflows                           -                        1.00         (96,000.00)         (96,000.00) PV of Cash outflows = PVCO         (96,000.00) Cash inflows                      1.00                  0.8772            26,500.00            23,245.61 Cash inflows                      2.00                  0.7695            26,500.00            20,390.89 Cash inflows                      3.00                  0.6750            26,500.00            17,886.75 Cash inflows                      4.00                  0.5921            26,500.00            15,690.13 Cash inflows = Salvage Value                      4.00                  0.5921            20,900.00            12,374.48 PV of Cash Inflows =PVCI            89,587.85 NPV= PVCI - PVCO            (6,412.15) b-1 Below since NPV is negative b-2 rejected since return from invetsment is less than required return of 14%

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