alue LO 16-2
Callaghan Company is considering investing in two new vans thatare expected to generate combined cash inflows of $27,500 per year.The vansâ combined purchase price is $99,000. The expected life andsalvage value of each are seven years and $20,000, respectively.Callaghan has an average cost of capital of 12 percent. (PV of $1and PVA of $1) (Use appropriate factor(s) from the tablesprovided.)
Required
a. Calculate the net present value of the investment opportunity.(Negative amount should be indicated by a minus sign. Roundintermediate calculations and final answer to 2 decimalplaces.)
Net present value
b-1. Indicate whether the investment opportunity is expected to earna return that is above or below the cost of capital.
Above Below
b-2. Based on youranswer in Requirement b-1, should the investment opportunity beaccepted. Rejected Accepted
alue LO 16-2
Callaghan Company is considering investing in two new vans thatare expected to generate combined cash inflows of $27,500 per year.The vansâ combined purchase price is $99,000. The expected life andsalvage value of each are seven years and $20,000, respectively.Callaghan has an average cost of capital of 12 percent. (PV of $1and PVA of $1) (Use appropriate factor(s) from the tablesprovided.) |
| Required |
| a. | Calculate the net present value of the investment opportunity.(Negative amount should be indicated by a minus sign. Roundintermediate calculations and final answer to 2 decimalplaces.)
| ||||
| b-1. | Indicate whether the investment opportunity is expected to earna return that is above or below the cost of capital. | ||||
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| b-2. | Based on youranswer in Requirement b-1, should the investment opportunity beaccepted. | ||||
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Related questions
Derrick Iverson is a divisional manager for Holston Company. Hisannual pay raises are largely determined by his divisionâs returnon investment (ROI), which has been above 20% each of the lastthree years. Derrick is considering a capital budgeting projectthat would require a $3,000,000 investment in equipment with auseful life of five years and no salvage value. Holston Companyâsdiscount rate is 15%. The project would provide net operatingincome each year for five years as follows: |
| Sales | $ | 2,500,000 | |
| Variableexpenses | 1,000,000 | ||
| Contribution margin | 1,500,000 | ||
| Fixedexpenses: | |||
| Advertising, salaries, and other fixed out-of-pocketcosts | $600,000 | ||
| Depreciation | 600,000 | ||
| Total fixedexpenses | 1,200,000 | ||
| Netoperating income | $ | 300,000 | |
| Click here to view Exhibit 13B-1and Exhibit 13B-2, to determine the appropriate discount factor(s)using tables. |
| Required: |
| 1. | Compute the project'snet present value. (Round discount factor(s) to 3 decimalplaces.) |
| 2. | Compute the project's simple rate of return. (Round youranswer to whole decimal place i.e. 0.123 should be considered as12%) |
| 3-a. | Would the company wantDerrick to pursue this investment opportunity? | ||||
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| 3-b. | Would Derrick beinclined to pursue this investment opportunity? | ||||
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Derrick Iverson is a divisional manager for Holston Company. Hisannual pay raises are largely determined by his divisionâs returnon investment (ROI), which has been above 25% each of the lastthree years. Derrick is considering a capital budgeting projectthat would require a $5,160,000 investment in equipment with auseful life of five years and no salvage value. Holston Companyâsdiscount rate is 18%. The project would provide net operatingincome each year for five years as follows: |
| Sales | $ | 4,400,000 | |
| Variableexpenses | 1,950,000 | ||
| Contribution margin | 2,450,000 | ||
| Fixedexpenses: | |||
| Advertising, salaries, and other fixed out-of-pocketcosts | $790,000 | ||
| Depreciation | 790,000 | ||
| Total fixedexpenses | 1,580,000 | ||
| Netoperating income | $ | 870,000 | |
| Required: |
| 1. | Compute the project's net present value. (Round discountfactor(s) to 3 decimal places, intermediate calculations and finalanswer to the nearest dollar amount.) Net Present value: |
| 2. | Compute the project's simple rate of return. (Round youranswer to 1 decimal place. i.e. 0.123 should be considered as12.3%.) Simple rate of return%: |
| 3-a. | Would the company wantDerrick to pursue this investment opportunity? | ||||
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| 3-b. | Would Derrick beinclined to pursue this investment opportunity? | ||||
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