Question

Baird Company is considering investing in two new vans that are expected to generate combined cash inflows of $30,500 per year. The vans’ combined purchase price is $93,000. The expected life and salvage value of each are six years and $20,700, respectively. Baird has an average cost of capital of 12 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
TABLE 1 PRESENT VALUE OF $1 4% 5% 6% 7% 8% 9% 10% 12% 14% 16% 20% n 0.952381 1 0.961538 0.943396 O.934579 0.925926 0.917431 O.909091 0.892857 0.877193 0.862069 0.833333 0.857339 0.694444 2 0.924556 0.907029 0.889996 0.873439 0.841680 0.826446 O.797194 0.769468 O.743163 0.888996 0.839619 0.793832 0.674972 3 0.863838 0.816298 0.772183 0.751315 O.711780 0.640658 0.578704 0.854804 0.552291 0.822702 0.792094 0.762895 0.735030 O.708425 0.683013 0.635518 0.592080 0.482253 0.821927 0.712986 0.620921 0.401878 5 O.783526 0.747258 0.680583 0.649931 0.567427 0.519369 0.476113 O.790315 O.704961 O.746215 0.666342 0.630170 0.596267 O.564474 0.506631 0.455587 0.410442 0.334898 0.710681 0.622750 0.399637 0.279082 7 O.759918 0.665057 0.583490 O.547034 0.513158 0.452349 0.353830 0.730690 0.676839 0.627412 0.582009 0.540269 0.501866 0.466507 0.403883 0.350559 0.305025 0.232568 0.360610 9 0.702587 0.644609 0.591898 0.543934 0.500249 0.460428 0.424098 0.307508 0.262953 0.193807 0.321973 10 0.675564 0.613913 0.558395 0.508349 0.463193 0.422411 0.385543 0.269744 0.226684 0.161506 0.475093 0.287476 0.236617 11 0.649581 O.584679 0.526788 0.428883 0.387533 0.350494 0.195417 0.134588 0.624597 0.318631 12 0.556837 0.496969 0.444012 0.397114 0.355535 0.256675 0.207559 0.168463 0.112157 0.145227 13 0.600574 0.530321 0.468839 0.414964 0.367698 0.326179 0.289664 0.229174 0.182069 0.093464 0.577475 0.442301 0.387817 0.125195 0.077887 14 0.505068 0.340461 0.299246 0.263331 0.204620 0.159710 0.555265 0.481017 15 0.417265 0.362446 0.315242 0.274538 0.239392 0.182696 0.140096 0.107927 0.064905 0.217629 0.458112 0.163122 0.122892 0.093041 16 O.533908 0.393646 0.338735 0.291890 0.251870 0.054088 17 0.513373 0.436297 0.371364 0.316574 0.270269 0.231073 0.197845 0.145644 0.107800 0.080207 0.045073 0.350344 18 0.493628 0.415521 0.295864 0.250249 0.211994 0.179859 0.130040 0.094561 0.069144 0.037561 0.474642 19 0.395734 0.330513 0.276508 0.231712 0.194490 0.163508 0.116107 0.082948 0.059607 0.031301 0.376889 0.258419 0.178431 0.148644 0.103667 20 0.456387 0.311805 0.214548 O.072762 0.051385 0.026084

Required

1. 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.)

2. 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

NPV = Present value of cash inflows – Present value of cash outflows

= 30,500*PVAF(12%, 6 years) + 20,700*2*PVF(12%, 6 years) – 93000

= 30,500*4.111407 +41,400*0.506631 – 93000

= $53,372.4369

Above cost of capital as NPV is positive at cost of capital

Should be accepted