Exercise 16-5 Determining net present value LO 16-2 Callaghan Company is conside

Question

Exercise 16-5 Determining net present value LO 16-2

Callaghan Company is considering investing in two new vans that are expected to generate combined cash inflows of $29,500 per year. The vans’ combined purchase price is $98,500. The expected life and salvage value of each are seven years and $20,500, respectively. Callaghan has an average cost of capital of 12 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Calculate the net present value of the investment opportunity. (Negative amount should be indicated by a minus sign. Round intermediate calculations and final answer to 2 decimal places.)

Net present value: ____

Callaghan Company is considering investing in two new vans that are expected to generate combined cash inflows of $29,500 per year. The vans’ combined purchase price is $98,500. The expected life and salvage value of each are seven years and $20,500, respectively. Callaghan has an average cost of capital of 12 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

Explanation / Answer

Combined cash inflows per year = 29,500

Combined purchase price = 98,500

Expected life of each van = 7 years

Salvage value of each van = 20,500

Present value of cash inflows = (29,500 * 4.5638) + (20,500 * 0.4523) + (20,500 * 0.4523)

= 134,632.1 + 9,272.15 + 9,272.15

= 153,176.4

Present value of cash outflows = 98,500 * 1 = 98,500

Net present value = Present value of cash inflows - Present value of cash outflows

= 153,176.4 - 98,500

= 54,676.4

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