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 are four years and $23,000, respectively. Monterey has an average cost of capital of 7 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) Required Calculate the net present value of the investment opportunity. (Round your intermediate calculations and final answer to 2 decimal places.) 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

Particulars	Year	Amount	PVF	Present value
Cash Inflow	1-4	$30,000	3.387	$101,610
Salvage value	4	46000	0.763	35,098
Present value of cash Inflow				$136,708
Less: Initial Outflow	0	93000	1.000	93,000
Net present value of the investment opportunity				$43,708

Investment opportunity is expected to earn a return above the cost of capital because it has positive NPV.

Investment should be accepted.