Question

Net Present Value A project has estimated annual net cash flows of $13,750 for two years and is estimated to cost $32,500. Assume a minimum acceptable rate of return of 20%. Use the Present Value of an Annuity of $1 at Compound Interest table below Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 0.870 0.833 0.943 1.833 2.673 1.528 1.626 2.283 2.106 0.909 1.736 2.487 3.170 3.791 4.355 3.465 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.212 2.855 3.353 3.785 2.589 2.991 3.326 3.605 4.917 5.582 4.868 4.160 4.968 4.487 3.837 6.210 5.335 6.802 5.759 107.3606.145 4.772 5.328 5.650 4.031 4.192 5.019 Determine (a) the net present value of the project and (b) the present value index. If required, use the minus sign to indicate a negative net present value. Net present value of the project (round to the nearest dollar) Present value index (rounded to two decimal places)

Answer 1

Initial investment = $32,500

Annual cash inflow = $13,750

Time (n) = 2 years

Interest rate (i) = 20%

Present value of cash inflow = Annual cash inflow x Present value annuity factor (i, n)

= 13,750 x Present value annuity factor (20%,2)

= 13,750 x 1.528

= $21,010

Net present value = Present value of cash inflow - Initial investment

= 21,010-32,500

= -$11,490

Present value index = Present value of cash inflow/ Initial investment

= 21,010/32,500

= 0.65

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