The Net Present Value (NPV) of Project Turtle
Year |
Annual cash flows ($) |
Present Value Factor (PVF) at 9.00% |
Present Value of annual cash flows ($) [Annual cash flow x PVF] |
1 |
1,80,000 |
0.9174312 |
1,65,137.61 |
2 |
1,80,000 |
0.8416800 |
1,51,502.40 |
3 |
1,80,000 |
0.7721835 |
1,38,993.03 |
4 |
1,80,000 |
0.7084252 |
1,27,516.54 |
5 |
1,80,000 |
0.6499314 |
1,16,987.65 |
6 |
1,80,000 |
0.5962673 |
1,07,328.12 |
7 |
1,80,000 |
0.5470342 |
98,466.16 |
8 |
1,80,000 |
0.5018663 |
90,335.93 |
9 |
1,80,000 |
0.4604278 |
82,877.00 |
10 |
1,80,000 |
0.4224108 |
76,033.95 |
TOTAL |
11,55,178.39 |
||
Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment
= $11,55,178.39 - $11,05,000
= $50,178.39
The Net Present Value (NPV) of Project Snake
Year |
Annual cash flows ($) |
Present Value Factor (PVF) at 9.00% |
Present Value of annual cash flows ($) [Annual cash flow x PVF] |
1 |
1,05,000 |
0.9174312 |
96,330.28 |
2 |
1,05,000 |
0.8416800 |
88,376.40 |
3 |
1,05,000 |
0.7721835 |
81,079.27 |
4 |
1,05,000 |
0.7084252 |
74,384.65 |
5 |
1,05,000 |
0.6499314 |
68,242.80 |
6 |
1,05,000 |
0.5962673 |
62,608.07 |
7 |
1,05,000 |
0.5470342 |
57,438.60 |
8 |
1,05,000 |
0.5018663 |
52,695.96 |
9 |
1,05,000 |
0.4604278 |
48,344.92 |
10 |
1,05,000 |
0.4224108 |
44,353.13 |
TOTAL |
6,73,854.06 |
||
Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment
= $6,73,854.06 - $625,000
= $ 48,854.06
Profitability Index (PI) for Project Turtle
Profitability Index (PI) = Present Value of annual cash inflows / Initial Investment
= $11,55,178.39 / $11,05,000
= 1.05
Profitability Index (PI) for Project Snake
Profitability Index (PI) = Present Value of annual cash inflows / Initial Investment
= $673,854.06 / $625,000
= 1.08
DECISION
-As per the Net Present Value method, the Project Turtle should be accepted, since it has the highest NPV of $50,178.39.
-As per the PI method, the Project Snake should be accepted, since it has the higher Profitability Index of 1.08.
NOTE
The formula for calculating the Present Value Inflow Factor (PVIF) is [1 / (1 + r)n], where “r” is the Discount Rate/Cost of capital and “n” is the number of years.
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