Answer:
To analyze the feasibility of investing in two new vans, Adams Company needs to calculate the present value of the future cash inflows and compare it with the cost of the investment. Here are the steps to do so:
1. Calculate the annual depreciation of each van as follows:
Depreciation per year = (Purchase price - Salvage value) / Life
Depreciation per year = ($92,500 - $21,800) / 4
Depreciation per year = $17,175
2. Calculate the annual cash inflows after depreciation for both vans as follows:
Annual cash inflows = $32,500 - Depreciation per year
Annual cash inflows = $32,500 - $17,175
Annual cash inflows = $15,325
3. Calculate the present value of the annual cash inflows for four years using the formula for the present value of an annuity:
PV = C x [1 - (1 + r)^-n] / r
Where PV is the present value, C is the annual cash inflow, r is the discount rate, and n is the number of years.
PV of cash inflows = $15,325 x [1 - (1 + 0.14)^-4] / 0.14
PV of cash inflows = $47,929.68
4. Calculate the present value of the salvage value of both vans at the end of the fourth year:
PV of salvage value = $21,800 / (1 + 0.14)^4
PV of salvage value = $12,220.28
5. Calculate the total present value of the investment by adding the present value of the cash inflows and the present value of the salvage value:
Total PV = PV of cash inflows + PV of salvage value
Total PV = $47,929.68 + $12,220.28
Total PV = $60,149.96
6. Compare the total present value of the investment with the cost of the investment to determine whether it is feasible:
Net present value (NPV) = Total PV - Cost
NPV = $60,149.96 - $92,500
NPV = -$32,350.04
Since the NPV is negative, the investment in two new vans is not feasible. The cost of the investment exceeds the present value of the future cash inflows, and Adams Company would suffer a net loss of $32,350.04. Therefore, the company should reconsider its investment decision or look for ways to reduce the cost of the investment or increase the expected cash inflows.
Step-by-step explanation: