Question

project has estimated annual net cash flows of $70,000 for four
years and is estimated to cost $190,000. Assume a minimum
acceptable rate of return of 10%. Use the **The sum of the
present values of a series of equal “Net cash flows” to be received
at fixed time intervals.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 (1) the net present value of the project and (2) the An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested.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. | Net Present
Value |
$
31,900 |
||||||||

Working: | ||||||||||

Present Value of annual cash inflows | $ 70,000 | x | 3.170 | = | $ 2,21,900 | |||||

Less:Cost of project | $ 1,90,000 | |||||||||

Net Present Value | $ 31,900 | |||||||||

b. | Profitability Index | 1.17 | ||||||||

Working: | ||||||||||

Profitability Index | = | Present Value of annual cash inflows/Cost of Project | ||||||||

= | $ 2,21,900 | / | $ 1,90,000 | |||||||

= | 1.17 |
|||||||||

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