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 $1 at Compound Interest|
Determine (1) the net present value of the project and (2) the An index computed by dividing the total present value of the net cash flow to be received from a proposed capital investment by the amount to be invested.present value index. If required, use the minus sign to indicate a negative net present value.
|Net present value of the project (round to the nearest dollar)||$|
|Present value index (rounded to two decimal places)|
|a.||Net Present Value||$ 31,900|
|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|
|Profitability Index||=||Present Value of annual cash inflows/Cost of Project|
|=||$ 2,21,900||/||$ 1,90,000|
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