Question

Part Five

APPLY THE CONCEPTS: Net present value and Present value index

McCall Industries is looking to invest in Project A or Project B. The data surrounding each project is provided below. McCall's cost of capital is 11%.
Project A	Project B
This project requires an initial investment of $172,500. The project will have a life of 6 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 $130,000. The project will have a life of 4 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	B
Step 1	Annual cash flow	130000-35000 95000	109000-60000 49000
Step 2
present value of cash flow		PVA11%,6*annual cash flow	PVA11%,4*annual cash flow
		4.23054*95000	3.10245*49000
		401901.30	152020.05
case A:Net present value
Total present value of net cash flow		401901.30	152020.05
Amount to be invested		-172500	-130000
Net present value		229401.3	22020.05
Case B :Profitability Index
Profitability index	present value /Initial investment	401901.30/172500 2.33	152020.05/130000 1.17