Question

Monterey company is considering investing in two new vans that are expected to generate combined cash inflows of $30,000 per year. The vans combined purchase price is $93,000. The expected life and salvage value of each or four years and $23,000, respectively. Monterey has an average cost of capital of 7%.

a. calculate the net present value of the investment opportunity.

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

Exercise 10-5A Determining net present value Monterey Company is considering investing in two new vans that are expected to generate combined cash inflows of $30,000 per year. The vans' combined purchase price is $93,000. The expected life and salvage value of each are four years and $23,000, respectively. Monterey has an average cost of capital of 7 percent Required Round your figures to two decimal points. a. Calculate the net present value of the investment opportunity. 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.

Answer 1

B2 for X в А 10-5 a. C D E F G H I J 1 10-5 a. present value = future value * = = $30,000 $ 46,000 * covou AwN present value present value TL present value cost of vans net present value present value present value table factor 3.387211 = $ 101,616.33 0.762895 = $ 35,093.17 $ 136,709.50 = $ 93,000.00 = $ 43,709.50 the investment opportunity is expected to earn a return that is above the cost of capital because the net present value of the investment is positive. the investment should be accepted because the net present value of the investment is positive.

for formulas and calculations, refer to the image below -

for X B 10-5 a. C A D E F G H I 10-5 a. present value = future value * present value table factor present value * =ROUND(-PV(7%,4,1,0),6 * =ROUND(-PV(7%,4,0,1),6) present value = 30000 present value = =23000*2 TL present value cost of vans net present value = =E3*G3 = =E4*G4 = =SUM(13:14) = 93000 = =15-16 b. the investment opportunity is expected to earn a return that is above the cost of capital because the net present value of the investment is positive. the investment should be accepted because the net present value of the investment is positive.

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