project has estimated annual net cash flows of $70,000 for four years and is est
ID: 2431262 • Letter: P
Question
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.
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.
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 4.192Explanation / Answer
a. Net Present Value $ 31,900 Working: 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 b. Profitability Index 1.17 Working: Profitability Index = Present Value of annual cash inflows/Cost of Project = $ 2,21,900 / $ 1,90,000 = 1.17
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