Lake Shuttle Inc., is considering investing in two new vans that are expected to
ID: 2443855 • Letter: L
Question
Lake Shuttle Inc., is considering investing in two new vans that are expected to generate combined cash inflows of $20,000 per year. The vans' combined purchase price is $65,000. The expected life and salvage value of each are four years and $15,000, respectively. Lake Shuttle has an average cost of capital of 14 percent.Required
a. Calculate the net present value of the investment opportunity.
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.
Explanation / Answer
a) Calculation of net present value YEAR Cash flows PV factor at 14% NPV 0 ($65,000) 1 ($65,000) 1 $20,000 0.877 17,540 2 $20,000 0.769 15,380 3 $20,000 0.675 13,500 4 $35,000 0.592 20,720 Net Present Value 2,140 Note: Here, the net present value is positive. b) Here the investment opportunity is expected to earn a return that is above the cost of capital. So this project should be accepted. Calculation of net present value YEAR Cash flows PV factor at 14% NPV 0 ($65,000) 1 ($65,000) 1 $20,000 0.877 17,540 2 $20,000 0.769 15,380 3 $20,000 0.675 13,500 4 $35,000 0.592 20,720 Net Present Value 2,140Related Questions
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