Question

Franklin 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 $99,000. The expected life and salvage value of each are seven years and $20,100, respectively. Franklin 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

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

No. of vans: 2 Cash inflow annuity: $32,000 Combined initial investment: $99,000 Time period in years: 7 Salvage value per van: $20,100The Return wil Cost of capital: 12%

Requirement a:

Future Value	Present Value Factor	Present Value
$32,000	4.563757	$146,040.22
40,200	0.452349	18,184.43
	Total Present Value	$164,224.65
	Cost of Vans	(99,000.00)
	Net Present Value	$65,224.65

Note:

The $40,200 is found by multiplying the salvage value by 2. This represents both vans.

Present Value is found by multiply future value by Present Value factor.

Requirement b:

Here, the net present value is positive, the investment opportunity can be expected to earn a rate of return that is greater than the cost of capital. The analysis suggests that the investment opportunity should be accepted.

a. The Net Present Value is $65,224.65.

b. The Return will be above the cost of capital.

The Investment opportunity should be accepted.