Question

Thornton Company is considering investing in two new vans that are expected to generate combined cash inflows of $32,000 per year. The vans' combined purchase price is $91,500. The expected life and salvage value of each are four years and $20,100, respectively. Thornton has an average cost of capital of 14 percent. (PV ory 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? Above Accepted

Answer 1

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a)	Net Present Value	25540
b)	Will the return be above or below the cost of capital	Above
	Should the investment opportunity be accepted.	Yes.

Calculation of NPV
	Year 0	Year 1	Year 2	Year 3	Year 4
Cost	-91500
Annual Cash Inflow		32000	32000	32000	32000
Salvage Value					40200
Net Cash Flow	-91500	32000	32000	32000	72200
Discount Factor @ 14%	1.000	0.877193	0.769468	0.674972	0.592080
Present Value	-91500	28070	24623	21599	42748
NPV	25540