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)

$

$