Question

Week 5 CNOW Assignment Calculator provided below. Rydell's cost of capital is 8%. Project A Project B This project requires an initial investment of $167,500. The project will have a life of 8 years. Annual revenues associated with the project will be $130,000 and expenses associated with the project will be $35,000. This project requires an initial investment of $137,500. The project will have a life of 7 years. Annual revenues associated with the project will be $109,000 and expenses associated with the project will be $60,000 Calculate the net present value and the present value index for each project using the present value tables provided below. Present Value of $1 (a single sum) at Compound Interest. Present Value of an Annuity of $1 at Compound Interest. Note: • Use a minus sign to indicate a negative NPV. • If an amount is zero, enter"0". • Enter the present value index to 2 decimals Project A Project B Total present value of net cash flow Amount to be invested Net present value Present value index Project A Project B

Answer 1

Project A

Net annual cash inflow = revenues – expenses = 130000-35000 = $95000

Present value of cash inflows = Net annual cash inflow*PVIFA(i=8%, n=8) = 95000*5.74664 = $545931

Project B

Net annual cash inflow = revenues – expenses = 109000-60000 = $49000

Present value of cash inflows = Net annual cash inflow*PVIFA(i=8%, n=7) = 49000*5.20637 = $255112

	Project A	Project B
Total present value of net cash flows	545931	255112
Amount to be invested	167500	137500
Net present value	$378431	$117612
Present value index:
Project A	3.26
Project B		1.86

Present value index = Total present value of net cash flows /Amount to be invested