Fanning 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 $94,500. The expected life and salvage value of each are five years and $21,400, respectively. Fanning has an average cost of capital of 16 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required. a. Calculate the net present value of the investment opportunity. Note: Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to 2 decimal places. 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.
Fanning 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 $94,500. The expected life and salvage value of each are five years and $21,400, respectively. Fanning has an average cost of capital of 16 percent. (PV of $1 and PVA of $1) Note: Use appropriate factor(s) from the tables provided. Required. a. Calculate the net present value of the investment opportunity. Note: Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to 2 decimal places. 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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Fanning 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 $94,500. The expected life and salvage value of each are five years and $21,400, respectively.
Fanning has an average cost of capital of 16 percent. (PV of $1 and PVA of $1)
Note: Use appropriate factor(s) from the tables provided.
Required
a. Calculate the net present value of the investment opportunity.
Note: Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to 2
decimal places.
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.
a. Net present value
b. Will the return be above or below the cost of capital?
b. Should the investment opportunity be accepted?
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