Quillen Company is performing a post-audit of a project completed one year ago.
ID: 1171405 • Letter: Q
Question
Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $250,170, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $44,200 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $262,536, will have a total useful life of 11 years, and will produce net annual cash flows of $37,700 per year. Click here to view PV table. Evaluate the success of the project. Assume a discount rate of 9%. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answers to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Original estimate net present value
Revised estimate net present value
Explanation / Answer
Original Estimate:
Initial Cost = C = $ 250170, Net Annual Cash Flow (NACF) = $ 44200, Tenure = 9 years and Disount Rate = 9 %
Net Present Value = 44200 x (1/0.09) x [1-{1/(1.09)^(9)}] - 250170 = $14819.9 or $ 14820 approximately.
Revised Estimate:
Initial Cost = $ 262536, Useful Life = 11 years, Remaining Life = 10 years, NACF = $ 37700 and Discount Rate = 9 %
Net Present Value = 37700 x (1/0.09) x [1-{1/(1.09)^(11)}] - 262536 = - 5980.31 or - $ 5980 approximately
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