Question

In: Accounting

Jordan Company is considering investing in two new vans that are expected to generate combined cash...

Jordan 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 $96,000. The expected life and salvage value of each are five years and $20,500, respectively. Jordan has an average cost of capital of 16 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. (Negative amount should be indicated by a minus sign. 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.

Hint**** 16 percent & 5 years

PV of $1.00 = 0.476113

Present Value of an annuity of $1.00 = 3.274294

a. Net present value ??????
b. Will the return be above or below the cost of capital? Above
Should the investment opportunity be accepted? Accepted

Solutions

Expert Solution

a. Net Present Value $ 23,386.60
b. above
Note:Since Internal rate of return of 24% is more than 16%.So, the return is more than cost of capital.
c. Investment opportunity should be accepted.
Working:
Net Present Value at 16% Net Present Value at 20%
Present Value of combined annual cash inflows $     99,865.97 Present Value of combined annual cash inflows $      91,213.67
Present Value of salvage value $     19,520.63 Present Value of salvage value $      16,476.98
Total $ 1,19,386.60 Total $ 1,07,690.65
Less:Combined initial investment $     96,000.00 Less:Combined initial investment $      96,000.00
Net Present Value $     23,386.60 Net Present Value $      11,690.65
Working: Working:
Present Value of combined annual cash inflows = 30500.00 x 3.274294 Present Value of combined annual cash inflows = 30500.00 x 2.990612
= 99865.97 = 91213.67
Present Value of combined salvage value = (20500 x 2)* 0.476113 Present Value of combined salvage value = (20500 x 2)* 0.401878
= $     19,520.63 = $      16,476.98
Internal rate of return = L+(H-L)*(A/(A-B)) cumulative discount factor = (1-(1+i)^-n)/i
= 16%+(20%-16%)*(23387/11696) = (1-(1+0.20)^-5)/0.20
= 24.00% = 2.990612
Where
L 16% Present Value of $ 1 = (1+i)^-n
H 20% = (1+0.20)^-5
A $ 23,386.60 = 0.401878
B $ 11,690.65
A-B $ 11,695.95

ekkarill92 answered 1 year ago
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