Chapter 16, Problem 5E

Exercise 10-5A Determining net present value

Monterey Company is considering investing in two new vans that are expected to generate combined cash inflows of $30,000 per year. The vans’ combined purchase price is $93,000. The expected life and salvage value of each are four years and $23,000, respectively. Monterey has an average cost of capital of 7 percent.

Required

Round your figures to two decimal points.

1. a. Calculate the net present value of the investment opportunity.
2. 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.