ucat Search In 12/7: 10-4A, 10-5A, & 10-6A Help Save & Exit Submit Saved Check m

Question

ucat Search In 12/7: 10-4A, 10-5A, & 10-6A Help Save & Exit Submit Saved Check my work 2 Benson Company is considering investing in two new vans that are expected to generate combined cash inflows of $35,000 per year. The vans' combined purchase price is $90,500. The expected life and salvage value of each are four years and $21,500, respectively. Benson has an average cost of capital of 16 percent (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.) nts Required a. Calculate the net present value of the investment opportunity. (Negative amount should be indicated by a minus eBook sign. Round your intermediate calculations and final answer to 2 decimal places.) Hint b. Indicate whether the investment opportunity is expected to earn a return that is above or below the cost of capital Print and whether it should be accepted. eferences a Net present value b. Will the return be above or below the cost of capital? Above Should the investment opportunity be accepted? Accepted SONY

Explanation / Answer

a. Net present value = Annual cash inflow × PVA of $1 (16%, 4 years) + Salvage value × PV of $1 (16%, 4 years) - Purchase price = 35,000×2.798181+21,500×0.552291-90,500 = 97,936.34+11,874.26-90,500 = $19,310.60

b. The return is above the cost of capital.

Since, the NPV is positive, the investment opportunity should be accepted.

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