Quillen Company is performing a post-audit of a project completed one year ago.
ID: 2501069 • 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 $235,455, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $45,200 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $246,162, will have a useful life of 11 years, and will produce net annual cash flows of $38,938 per year. (Refer the below table)
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Original estimate net present value $ Revised estimate net present value $Explanation / Answer
Original estimate-Cash Flows × 11% Discount Factor = Present Value
Present value of net annual cash flows $45,200 × 5.53705 = $250,275
Present value of salvage value 0 × 390925= 0
$250,275
Capital investment $235,455
Net present value $14,820 (250,275-0=250,275-235,455=14,820)
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Revised estimate Cash Flows × 11% Discount Factor = Present Value
Present value of net annual cash flows $38,938 × 6.20652 = $241,669
Present value of salvage value 0 × 0.317283= 0
$241,669
Capital investment $246,162
Net present value $(4,493) (241,669-0=241,669-246,162=-4,493)
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The original net present value was projected to be a positive $14,820; however, the revised estimate is a negative $4,493. The project is not a success.
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