Brief Exercise 24-6 Quillen Company is performing a post-audit of a project comp
ID: 2328743 • Letter: B
Question
Brief Exercise 24-6
Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $243,777, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $46,600 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $237,323, will have a total useful life of 11 years, and will produce net annual cash flows of $37,300 per year. Click here to view PV table.
Evaluate the success of the project. Assume a discount rate of 11%. (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.)
The project
a success.
Original estimate net present value $ Revised estimate net present value $Explanation / Answer
Since revised project results in negative NPV , The project is not a successful one.
Quillen Company : Particulars Original ($) Revised ($) Cost of project 243,777 237,323 Useful Life 9 Years 11 Years Salvage value 0 0 Net cash flows 46,600 37,300 Discounting rate 11% 11% 1) Calculation of Net present value for original estimate : Net present value = Present value of cash inflows - present value of cash outflows a) present value of cash outflows in the year 0 = $ 243,777*1 $243,777 b) Present value of cash inflows : year Cash flows present value factor @ 11% present value of cash inflows 1 46600 0.90090 41981.98198 2 46600 0.81162 37821.60539 3 46600 0.73119 34073.51837 4 46600 0.65873 30696.8634 5 46600 0.59345 27654.83189 6 46600 0.53464 24914.26296 7 46600 0.48166 22445.28195 8 46600 0.43393 20220.97473 9 46600 0.39092 18217.09435 present value of cash inflows 258026.415 Therefore, Net present value = $ 258026 - $ 243,777 14249 $14,249 2) Calculation of Net present value for original estimate : Net present value = Present value of cash inflows - present value of cash outflows a) present value of cash outflows in the year 0 = $ 237,323*1 $237,323 b) Present value of cash inflows : year Cash flows present value factor @ 11% present value of cash inflows 1 37300 0.90090 33603.6036 2 37300 0.81162 30273.51676 3 37300 0.73119 27273.43852 4 37300 0.65873 24570.66534 5 37300 0.59345 22135.73454 6 37300 0.53464 19942.10319 7 37300 0.48166 17965.85873 8 37300 0.43393 16185.45831 9 37300 0.39092 14581.49397 10 37300 0.35218 13136.48106 11 37300 0.31728 11834.66762 present value of cash inflows 231503.0216 Therefore, Net present value = $ 231503- $ 237,323 -5820 ($5,820)Related Questions
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