Exercise 16-5 Determining net present value
Metro Shuttle Inc. is considering investing in two new vans that are expected to generate combined cash inflows of $28,000 per year. The vans’ combined purchase price is $91,000. The expected life and salvage value of each are four years and $21,000, respectively. Metro Shuttle has an average cost capital of 14 percent.
a. Calculate the net present value of the investment opportunity.
PV
= FV
X
Present Value = Present Value
Equivalent
Table Factor
Period 1 PV = 28,000 X
0.877193 =
$24,561
Period 2 PV = 28,000 X
0.769468 =
21,545
Period 3 PV = 28,000 X
0.674972 =
18,899
Period 4 PV = 28,000 X
0.592080 =
16,578
Total
$ 81,583
Present value of future cash inflows
81,583
Cost of Investment
91,000
Net present value
(9,417)
$
$
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