Question

A project has estimated annual net cash flows of $6,250 for five years and is estimated to cost $32,500. Assume a minimum acceptable rate of return of 15%. Use the Present Value of an Annuity of $1 at Compound Interest table below.

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

a.

Cost of investment = $32,500

Annual cash inflow = $6,250

Time (n) = 5 year

Interest rate (i) = 15%

Present value of cash inflows = Annual cash inflows x Present value annuity factor (i%, n)

= 6,250 x PVAF (15%, 5)

= 6.250 x 3.353

= $20,956

Net present value = Present value of cash inflows - Cost of investment

= 20,956 - 32,500

= - $11,544

b.

Present value index = Present value of cash inflows/Cost of investment

= 20,956/32,500

= 0.64

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