Question

Part A - Net Present Value

A project has estimated annual net cash flows of $10,000 for one years and is estimated to cost $50,000. Assume a minimum acceptable rate of return of 10%. 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)

Part B - Internal Rate of Return

A project is estimated to cost $199,850 and provide annual net cash flows of $70,000 for four years.

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 the internal rate of return for this project, using the Present Value of an Annuity of $1 at Compound Interest table shown above:

?%

Answer 1

Part a
	Project
PV of annual NCF	9090	( 10000 * PVIF ( 10 % , 1 year )
Less:- Invstmt.	-50000	( 10000 * 0.909 )
NPV	-40910
Part b
PV index =
	Project
PV of annual NCF	9090
divided by Invstmt.	50000
PV index	0.1818
IRR
AT IRR , NPV = PV of cash inflows
199850 = 70000 * PVIFA ( IRR, 4 )
PVIFA ( IRR , 4 ) = 199850 / 70000
PVIFA ( IRR, 4) = 2.855
At seeing the table , we find that at PVIFA ( 15 % , 4 ) = 2.855
So, IRR = 15%