Question

Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $224,000, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $44,900 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $228,000, will have a total useful life of 11 years (including the year just completed), and will produce net annual cash flows of $37,500 per year. Click here to view PV table.

Evaluate the success of the project. Assume a discount rate of 12%. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answers to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Original estimate net present value		$
Revised estimate net present value		$

The project

isis not

a success.

Answer 1

Solution:

Computation of Original Estimate NPV
Particulars	Period	PV Factor	Amount	Present Value
Cash outflows:
Initial investment	0	1	$224,000	$224,000
Present Value of Cash outflows (A)				$224,000
Cash Inflows
Annual cash inflows	1-9	5.32825	$44,900	$239,238
Present Value of Cash Inflows (B)				$239,238
Net Present Value (NPV) (B-A)				$15,238

Computation of Revised Estimate NPV
Particulars	Period	PV Factor	Amount	Present Value
Cash outflows:
Initial investment	0	1	$228,000	$228,000
Present Value of Cash outflows (A)				$228,000
Cash Inflows
Annual cash inflows	1-11	5.93770	$37,500	$222,664
Present Value of Cash Inflows (B)				$222,664
Net Present Value (NPV) (B-A)				-$5,336

As revised estimate NPV is negative, therefore project is not a success.