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 of capital of 14 percent.
Required
a. Calculate the net present value of the investment opportunity.
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.
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