Benson Company is considering investing in two new vans that are expected to gen

Question

Benson Company is considering investing in two new vans that are expected to generate combined cash inflows of $27,500 per year. The vans’ combined purchase price is $91,500. The expected life and salvage value of each are six years and $20,200, respectively. Benson 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 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.

Explanation / Answer

Computation of net present value of the investment opportunity (NPV)

Present value of cash inflows :

Cash inflows * PVIFA (12 % , 6 years)

Terminal inlow of salvage value

Salvage Value * 2 * PVIF (12 % , 6 years)

Conclusion : Since the npv is positive it is expected to earn a return that is above the cost of capital and thus it should be accepted.

Note :

Particulars Working Amount ($) Intial outflow : Cost * 1 $91,500 * 1 (91,500)

Present value of cash inflows :

Cash inflows * PVIFA (12 % , 6 years)

$27,500 * 4.1114 113,063.50

Terminal inlow of salvage value

Salvage Value * 2 * PVIF (12 % , 6 years)

$20,200 * 2 * 0.5066 $20,466.64 NPV $42,030.14

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