Question

APPLY THE CONCEPTS: Net present value and Present value index

Sutherland Inc. is looking to invest in Project A or Project B. The data surrounding each project is provided below. Sutherland's cost of capital is 10%.
Project A	Project B
This project requires an initial investment of $172,500. The project will have a life of 3 years. Annual revenues associated with the project will be $130,000 and expenses associated with the project will be $35,000.	This project requires an initial investment of $130,000. The project will have a life of 5 years. Annual revenues associated with the project will be $115,000 and expenses associated with the project will be $60,000.

Calculate the net present value and the present value index for each project using the present value tables provided below.

Present Value of $1 (a single sum) at Compound Interest.

Present Value of an Annuity of $1 at Compound Interest.

Note:
•	Use a minus sign to indicate a negative NPV.
•	If an amount is zero, enter "0".
•	Enter the present value index to 2 decimals.

	Project A		Project B
Total present value of net cash flow	$		$
Amount to be invested
Net present value	$		$
Present value index:
Project A
Project B

Answer 1

Calculation of Net present value :

	Project A	Project B
Annual cash flow [Revenue-expense]	130000-35000=95000	115000-60000=55000
Total present value of net cash flow	[PVA10%,3*annual cash flow] [2.48685*95000] 236250.75	[PVA10%,5*annual cash flow] [3.79079*55000] 208493.45
less: Amount to be invested	-172500	-130000
Net present value	63750.75	78493.45

b)Calculation of present value Index : Total present value of net cash flow /Initial cost

	Project A	Project B
Present value Index	236250.75/172500	208493.45/130000
	1.37	1.60