A project has estimated annual net cash flows of $11,250 for five years and is e

Question

A project has estimated annual net cash flows of $11,250 for five years and is estimated to cost $42,500. Assume a minimum acceptable rate of return of 15%. Use the Present Value of an Annuity of $1 at Compound Interest table below.

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.

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

Explanation / Answer

Part 1

Net present value = present value of cash inflows - present value of cash outflow = (11250*3.353) - 42500 = 37721.25 - 42500 = -4778.75 = - 4779

Present value of cash inflows = annual cash inflow * pvifa(15%,5yr) = 11250*3.353 = 37721.25

Part 2

Present value index = Present value of cash inflows/Initial investment = 37721.25/42500 = 0.89

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