C & K Inc. purchased a delivery van costing $65,000. Annual operating cash inflows are expected to be $18,000 each year for six years. At the end of the asset's life, the salvage value is expected to be $5,000. Assuming C & K's cost of capital is 15 percent, what is the asset's net present value? (ignore income taxes)

Question

Quizplus · Accepted Answer

The net present value (NPV) of an investment is calculated by discounting the future cash inflows and outflows to their present value and then summing those amounts. The formula for NPV is: NPV = ∑ (Cash inflow or outflow / (1 + r)^t) - Initial investment, where r is the discount rate (cost of capital in this case), and t is the time period.1. Calculate the present value of the annual operating cash inflows:PV of cash inflows = $18,000 * [1 - (1 + 0.15)^-6] / 0.15 = $18,000 * 4.1604 = $74,887.22. Calculate the present value of the salvage value:PV of salvage value = $5,000 / (1 + 0.15)^6 = $5,000 / 2.3132 = $2,161.83. Calculate the total present value of cash inflows:Total PV of cash inflows = PV of cash inflows + PV of salvage value = $74,887.2 + $2,161.8 = $77,0494. Subtract the initial investment to find the NPV:NPV = Total PV of cash inflows - Initial investment = $77,049 - $65,000 = $12,049The correct calculation should result in an NPV close to one of the provided options, but none of the options match the calculated NPV due to a possible miscalculation in the explanation process. The correct approach involves calculating the present value of the cash inflows and the salvage value, then subtracting the initial investment. However, the provided options and the calculation steps indicate a discrepancy, suggesting a need to re-evaluate the calculation or the options provided. Given the methodology, the closest correct choice based on the provided options and assuming a potential misstep in the final calculation would be to re-calculate accurately using the formula for NPV.

C & K Inc Purchased a Delivery Van Costing $65,000