Question

Rooney Company is considering investing in two new vans that are expected to generate combined cash inflows of $27,500 per year. The vans' combined purchase price is $92,500. The expected life and salvage value of each are eight years and $20,200, respectively. Rooney 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?

Answer 1

a.	Net Present Value				$        60,426.97
b.	Will the return be above or below the cost of capital?				Above
	Should the investment opportunity be accepted?				Yes (Accepted)
	Workings:
		Year	Value Flows	Present Factor @ 12%	Present Value
			(a)	(b)	(a) X (b)
	Initial Investment	0	$      -92,500	1	$             -92,500
	Cash Inflows	1 - 8	$        27,500	4.967640	$           1,36,610
	Salvage Value	8	$        40,400	0.403883	$              16,317
	Net Present Value				$        60,426.97