Question

Net Present Value

A project has estimated annual net cash flows of $11,250 for
five years and is estimated to cost $46,950. 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 | 3.352 | 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 |

Determine (1) the net present value of the project (if required, round to the nearest dollar) and (2) the present value index (rounded to two decimal places). If required, use the minus sign to indicate a negative net present value.

(1) Net present value of the project | $ |

(2) Present value index |

Answer #1

- Determination of the net present value of the project:

Computation of net present value (NPV):

NPV = Net present value (NPV) = present value of cash inflows – present value of cash outflows

Given information,

Initial cost $46,950

Cash inflows for 5 years = $11,250

salvage value =0

rate of return = 15%

Period – 5 years

Net Present Value = $11,250 (P/A, 15%, 5) - $46,950 x 1.00

NPV = 11,250 x 3.352 – 46,950

= 37,710 – 46,950

NPV = - $9,240

Net Present Value of the Project = ($9,240)

- Present value index:

Present value index = present value of future cash inflows/initial investment

Present value index = 37,710/46950 = 0.803

The present value index is less than 1, which indicates that the project is not profitable.

Net Present Value A project has estimated annual net cash flows
of $8,750 for two years and is estimated to cost $44,726. Assume a
minimum acceptable rate of return of 12%. 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...

A project is estimated to cost $191,850 and provide annual net
cash flows of $50,000 for eight years.
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...

A project is estimated to cost $454,730 and provide annual net
cash flows of $74,000 for 10 years.
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...

A project has estimated annual net cash flows of $12,500 for ten
years and is estimated to cost $37,500. Assume a minimum acceptable
rate of return of 20%. 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...

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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...

project has estimated annual net cash flows of $70,000 for four
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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...

Keystone Healthcare Corp. is proposing to spend $150,570 on a
10-year project that has estimated net cash flows of $30,000 for
each of the 10 years.
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...

Buckeye Healthcare Corp. is proposing to spend $120,640 on a
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each of the seven years.
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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...

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0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283
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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
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