Question

a. Determine the average rate of return for a project that is estimated to yield total income of $419,900 over five years, has a cost of $769,100, and has a $114,900 residual value. Round to the nearest whole number.
%

b.

Net Present Value

A project has estimated annual net cash flows of $8,750 for three years and is estimated to cost $50,000. 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

a
Average annual net income	83980	=419900/5
Divide by Average Investment	442000	=(769100+114900)/2
Average rate of return	19%
b
Annual net cash flows	8750
X PV factor	2.283
Present value of Annual net cash flows	19976
Less: Investment cost	50000
Net present value of the project	-30024
Present value of Annual net cash flows	19976
Divide by Investment cost	50000
Present value index	0.40