Exercise 10-5A Determining net present value LO 10-2 Rundle Company is considering Investing in two new vans that are expected to generate combined cash Inflows of $27,000 per year. The vans' combined purchase price is $97,500. The expected life and salvage value of each are seven years and $21,100, respectively. Rundle has an average cost of capital of 12 percent. (PV of $1 and PVA of $1) (Use approprlate factor(s) from the tables provided.) Required a. Calculate the net present value of the Investment opportunity. (Negative amount should be indicated by a minus sign. Round your Intermediate calculations and final answer to 2 decimal places.) 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. a. Net present value b. Will the return be above or below the cost of capital? Should the investment opportunity be accepted? 6% TABLE 1 PRESENT VALUE OF $1 n 4% 5% 7% 8% 9% 10% 12% 14% 16% 20% 10.961538 0.952381 0.943396 0.934579 0.925926 0.917431 0.909091 0.892857 0.877193 0.862069 0.833333 2 0.924556 0.907029 0.889996 0.873439 0.857339 0.841680 0.826446 0.797194 0.769468 0.743163 0.694444 30.888996 0.863838 0.839619 0.816298 0.793832 0.772183 0.751315 0.711780 0.674972 0.640658 0.578704 4 0.854804 0.822702 0.792094 0.762895 0.735030 0.708425 0.683013 0.635518 0.592080 0.552291 0.482253 5 0.821927 0.783526 0.747258 0.712986 0.680583 0.649931 0.620921 0.567427 0.519369 0.476113 0.401878 6 0.790315 0.746215 0.704961 0.666342 0.630170 0.596267 0.564474 0.506631 0.455587 0.410442 0.334898 7 0.759918 0.710681 0.665057 0.622750 0.583490 0.547034 0.513158 0.452349 0.399637 0.353830 0.279082 8 0.730690 0.676839 0.627412 0.582009 0.540269 0.501866 0.466507 0.403883 0.350559 0.305025 0.232568 9 0.702587 0.644609 0.591898 0.543934 0.500249 0.460428 0.424098 0.360610 0.307508 0.262953 0.193807 10 0.675564 0.613913 0.558395 0.508349 0.463193 0.422411 0.385543 0.321973 0.269744 0.226684 0.161506 11 0.649581 0.584679 0.526788 0.475093 0.428883 0.387533 0.350494 0.287476 0.236617 0.195417 0.134588 12 0.624597 0.556837 0.496969 0.444012 0.397114 0.355535 0.318631 0.256675 0.2075590.168463 0.112157 13 0.600574 0.530321 0.468839 0.414964 0.367698 0.326179 0.289664 0.229174 0.182069 0.145227 0.093464 14 0.577475 0.505068 0.442301 0.387817 0.340461 0.299246 0.263331 0.204620 0.159710 0.125195 0.077887 15 0.555265 0.481017 0.417265 0.362446 0.315242 0.274538 0.239392 0.182696 0.140096 0.107927 0.064905 16 0.533908 0.458112 0.393646 0.338735 0.291890 0.251870 0.217629 0.163122 0.122892 0.093041 0.054088 17 0.513373 0.436297 0.371364 0.316574 0.270269 0.231073 0.197845 0.145644 0.107800 0.080207 0.045073 18 0.493628 0.415521 0.350344 0.295864 0.250249 0.211994 0.179859 0.130040 0.094561 0.069144 0.037561 19 0.474642 0.395734 0.330513 0.276508 0.231712 0.194490 0.163508 0.116107 0.082948 0.059607 0.031301 20 0.456387 0.376889 0.311805 0.258419 0.214548 0.178431 0.148644 0.103667 0.072762 0.051385 0.026084 5% TABLE 2 PRESENT VALUE OF AN ANNUITY OF $1 n 4% 6% 7% 8% 9% 10% 12% 14% 16% 20% 1 0.961538 0.952381 0.943396 0.934579 0.925926 0.917431 0.909091 0.892857 0.877193 0.862069 0.833333 2 1.886095 1.859410 1.833393 1.808018 1.783265 1.759111 1.735537 1.690051 1.646661 1.605232 1.527778 3 2.775091 2.723248 2.673012 2.624316 2.577097 2.531295 2.486852 2.401831 2.321632 2.245890 2.106481 4 3.629895 3.545951 3.465106 3.387211 3.312127 3.239720 3.169865 3.037349 2.913712 2.798181 2.588735 5 4.451822 4.329477 4.212364 4.100197 3.992710 3.889651 3.790787 3.604776 3.433081 3.274294 2.990612 6 5.242137 5.075692 4.917324 4.766540 4.622880 4.485919 4.355261 4.111407 3.888668 3.684736 3.325510 7 6.002055 5.786373 5.582381 5.389289 5.206370 5.032953 4.868419 4.563757 4.288305 4.038565 3.604592 8 6.732745 6.463213 6.209794 5.971299 5.746639 5.534819 5.334926 4.967640 4.638864 4.343591 3.837160 9 7.435332 7.107822 6.801692 6.515232 6.246888 5.995247 5.759024 5.328250 4.946372 4.606544 4.030967 10 8.110896 7721735 7.360087 7.023582 6.710081 6.417658 6.144567 5.650223 5.216116 4.833227 4.192472 11 8.760477 8.306414 7.886875 7.498674 7.138964 6.805191 6.495061 5.937699 5.452733 5.028644 4.327060 12 9.385074 8.863252 8.383844 7.942686 7.536078 7160725 6.813692 6.194374 5.660292 5.197107 4.439217 13 9.985648 9.393573 8.852683 8.357651 7.903776 7486904 7103356 6.423548 5.842362 5.342334 4.532681 14 10.563123 9.898641 9.294984 8.745468 8.244237 7.786150 7.366687 6.628168 6.002072 5.467529 4.610567 15 11.118387 10.379658 9.712249 9.107914 8.559479 8.060688 7.606080 6.810864 6.142168 5.575456 4.675473 16 11.652296 10.837770 10.105895 9.446649 8.851369 8.312558 7.823709 6.973986 6.265060 5.668497 4.729561 17 12.165669 11.274066 10.477260 9.763223 9.121638 8.543631 8.021553 7.119630 6.372859 5.748704 4.774634 18 12.659297 11.689587 10.827603 10.059087 9.371887 8.755625 8.201412 7.249670 6.467420 5.817848 4.812195 19 13.133939 12.085321 11.158116 10.335595 9.603599 8.905115 8.364920 7.365777 6.550369 5.877455 4.843496 20 13.590326 12.462210 11.469921 10.594014 9.818147 9.128546 8.513564 7.469444 6.623131 5.928841 4.869580 Exercise 10-6A Determining net present value LO 10-2 Aaron Heath is seeking part-time employment while he attends school. He is considering purchasing technical equipment that will enable him to start a small training services company that will offer tutorial services over the Internet. Aaron expects demand for the service to grow rapidly in the first two years of operation as customers learn about the availability of the Internet assistance. Thereafter, he expects demand to stabilize. The following table presents the expected cash flows: Year of Operation 2019 2020 2021 2022 Cash Inflow $12,600 19,500 22,200 22,200 Cash Outflow $ 8,700 11,300 12,900 12,900 In addition to these cash flows, Aaron expects to pay $20,900 for the equipment. He also expects to pay $3,100 for a major overhaul and updating of the equipment at the end of the second year of operation. The equipment Is expected to have a $1,900 salvage value and a four year useful life. Aaron desires to earn a rate of return of 10 percent. (PV of $1 and PVA of $1) (Use approprlate factor(s) from the tables provided.) Required a. Calculate the net present value of the Investment opportunity. (Negative amount should be indicated by a minus sign. Round Intermediate calculations and final answer to 2 decimal places.) b. Indicate whether the investment opportunity is expected to earn a return that is above or below the desired rate of return and whether it should be accepted. a. Net present value b. Will the return be above or below the cost of capital? Should the investment opportunity be accepted