Question

A project has estimated annual cash flows of $90,000 for 3 years and is estimated to cost $250,000. Assume a minimum acceptable rate of return of 10%.

Present Value of $1 at Compound Interest

Year		6%		10%		12%
1		0.943		0.909		0.893
2		0.890		0.826		0.797
3		0.840		0.751		0.712
4		0.792		0.683		0.636
5		0.747		0.621		0.567

Present Value of an Annuity of $1 at Compound Interest

Year		6%		10%		12%
1		0.943		0.909		0.893
2		1.833		1.736		1.690
3		2.673		2.487		2.402
4		3.465		3.170		3.037
5		4.212		3.791		3.605

Use the tables above.

a. Determine the net present value of the project. Enter negative values as negative numbers.
$

b. Determine the present value index. Round your answer to two decimal places.

Answer 1

a) Calculation of Net Present Value:

Present outflow = - $250,000

Present value of future inflows = 90,000 x Present value annuity factor @10%

= 90,000 x 2.487

= $ 223,830

So the net present value = 223830 - 250000 = - $26,170

b) Present Value index = Present value of future inflows ÷ Present Value of outflows

= 223830 / 250000 = 0.90