Problem:
Determining net present value
Transit Shuttle Inc. is considering investing in two new vans that are expected to generate combined cash inflows of $20,000 per year. The vans' combined purchase price is $65,000. The expected life and salvage value of each are four years and $15,000, respectively. Transit Shuttle has an average cost of capital of 14 percent.
Required to do:
Q1. Calculate the net present value of the investment opportunity.
Q2. 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.