Jordan Company is considering investing in two new vans that are expected to gen
ID: 2520236 • Letter: J
Question
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? AcceptedExplanation / Answer
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
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.