Question BE12-6 is posted several times: Quillen Company is performing a post-au
ID: 2422798 • Letter: Q
Question
Question BE12-6 is posted several times: Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were the project would cost $250,000, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $46,000 per year. Now that the investment has been in operation for 1 year revised figures indicate that it actually costs $260,000, will have a useful life of 11 years, and will produce net annual cash flows of $39,000 per year. Evaluate the success of the project. Assume a discount rate of 10%. The answer excel spread sheet is set up Original Estimate 10% Cash Flows X Discount Factor = Present Value Present value of net annual cash flows $ X = Present value of salvage value $ X = Less: Capital investment Net present value Revised Estimate 10% Cash Flows X Discount Factor = Present Value Present value of net annual cash flows $ X = Present value of salvage value $ X = Less: Capital investment Net present value Was the project successful? Why or why not?
Explanation / Answer
Original estimate-Cash Flows × 10%
Discount Factor = Present Value
Present value of net annual cash flows $46,000 × 5.75902 = $264,914
Present value of salvage value 0 × 0.42410 = 0
Capital investment $250,000
Net present value $14,630 (264,914-0=264,914-250,000=14,914)
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Revised estimate Cash Flows × 10% Discount Factor = Present Value
Present value of net annual cash flows $39,000 × 6.49506 = $253,307
Present value of salvage value 0 × 0.35049 = 0
Capital investment $260,000
Net present value $(5,231) (260,000-0=253,307=6,693)
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The original net present value was projected to be a positive $14,914; however, the revised estimate is a positive $6,693. The project is not a success.
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