Question

1) What is the NPV of a project that costs $89,000 today and is expected to generate annual cash inflows of $18,000 for the next 8 years. Cost of capital (discount rate) is 13%. Round to the nearest cent.

2) What is the Profitability Index of a project that costs $22,000 today and is expected to generate annual cash inflows of $5,000 for the following 7 years. Cost of capital is 9%. Round to two decimal places.

3) A project has an initial cost of $44,000 and is expected to generate a single cash inflow of $108,000 in 4 years. What is its IRR? Round to the tenth of a percent (e.g. 5.6%=5.6).

4) What is the NPV of a project that costs $32,000 today and is expected to generate annual cash inflows of $11,000 for the next 7 years, followed by a final inflow of $14,000 in year 8. Cost of capital is 8.6%. Round to the nearest cent.

Answer 1

1)

Compute the present value annuity factor (PVIFA), using the equation as shown below:

PVIFA = {1 – (1 + Rate)-Number of periods}/ Rate

                   = {1 – (1 + 0.13)-8}/ 13%

             = 4.79877029436

Hence, the present value annuity factor is 4.79877029436.

Compute the net present value (NPV), using the equation as shown below:

NPV = (Annual cash flows*PVIFA) – Initial investment

         = ($18,000*4.79877029436) - $89,000

         = $86,377.8652984 - $89,000

         = -$2,622.1347016

Hence, the NPV of the investment is -$2,622.1347016.