Question

Dip N’ Dunk Doughnuts has computed the net present value for capital expenditure at two locations. Relevant data related to the computation are as follows:

	Ft. Collins		Boulder
Total present value of net cash flow	$216,140		$220,800
Amount to be invested	(202,000)		(240,000)
Net present value	$14,140		$(19,200)

a. Determine the present value index for each proposal. Round your answer for the present value index to two decimal places.

	Ft. Collins	Boulder
Total present value of net cash flow	$	$
Amount to be invested	$	$
Present value index

Internal Rate of Return Method

The internal rate of return method is used by Testerman Construction Co. in analyzing a capital expenditure proposal that involves an investment of $71,792 and annual net cash flows of $16,000 for each of the eight years of its useful life.

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	3.352	2.991
6	4.917	4.355	4.111	3.784	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

a. Determine a present value factor for an annuity of $1 which can be used in determining the internal rate of return. If required, round your answer to three decimal places.

b. Using the factor determined in part (a) and the present value of an annuity of $1 table above, determine the internal rate of return for the proposal.
%

Answer 1

Dip N Dunk

	Ft. Collins	Boulder
Total present value of net cash flow	$       216,140	$       220,800
Amount to be invested	$       202,000	$       240,000
Present Value Index	1.07	0.92

Present Value Index = Total present value of net cash flow / Amount to be invested

Testerman Construction Co.

a.
Present Value Factor = $71792 / 16000 = 4.487

b.
IRR = 15%
Since PV Factor for 8 years @15% is 4.487

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