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) |
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 |
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