A project has estimated annual cash flows of $90,000 for three years and is esti

Question

A project has estimated annual cash flows of $90,000 for three years and is estimated to cost $250,000. Assume a minimum acceptable rate of return of 10%. Using the following tables determine the (a) net present value of the project and (b) the present value index, rounded to two decimal places.

Below is a table for the present value of $1 at compound interest.

Year 6% 10% 12%
1 .943 .909 .893
2 .890 .826 .797
3 .840 .751 .712
4 .792 .683 .636
5 .747 .621 .567


Below is a table for the present value of an annuity of $1 at compound interest.

Year 6% 10% 2%
1 .943 .909 .893
2 1.833 1.736 1.690
3 2.673 2.487 2.402
4 3.465 3.170 3.037
5 4.212 3.791 3.605

Explanation / Answer

Since we are receiving this money at the end of each year in more than one payment, it is an annuity. Since it has 3 periods and has a rate of 12%, we grab that information from that column/row. 4000 * 2.402 = 9608 PV

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