Question

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Net Present Value A project has estimated annual net cash flows of $5,000 for two years and is estimated to cost $30,000. Assume a minimum acceptable rate of return of 6%. 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% 12% 15% 20% 10% 2.106 4.212 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 4 3.465 3.170 3.037 2.855 2.589 5 3.791 3.605 3.353 2.991 4.917 4.111 3.785 3.326 7 5.582 4.868 4.564 4.160 3.605 6.210 4.968 4.487 3.837 6.802 5.759 5.328 4.772 4,031 10 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) 5.335 7.360 II

Answer 1

PVA Table Project Year Value @ 6% Cash Flows PVCF 1 to 2 years 1.833* 5000 = 9165 Present Value of Net cashflows 9165 Net Present Value = Present Value of Net cash flows- Investment Project 9165 - 30000 -20835 Present Value index = Present Value of Net cash flows / Investment Project 9165 / 30000 0.31 Answers A) Net Present Value Present Value of Net cashflows Less : Amount to be invested Net present Value B) Present Value index Project 9165 30000 -20835 0.31