Question

Net Present Value A project has estimated annual net cash flows of $8,750 for five years and is estimated to cost $47,500. Assume a minimum acceptable rate of return of 15%. 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% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.353 2.991 6 4.917 4.355 4.111 3.785 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 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

Value @ Project Year 15% Cash Flows PVCF 1 to 5 years 3.353 * 8750 = 29339 Present Value of Net cashflows 29339 Net Present Value = Present Value of Net cash flows- Investment Project 29339 - 47500 -18161 Present Value index = Present Value of Net cash flows / Investment Project 29339 / 47500 0.62 Answers A) Net Present Value Present Value of Net cashflows Less : Amount to be invested Net present Value B) Present Value index Project 29339 47500 -18161 (or) -18170 0.62