A project has estimated annual cash flows of $95,000 for four years and is estim

Question

A project has estimated annual cash flows of $95,000 for four years and is estimated to cost $260,000. 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%

12%

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

Year

6%

10%

12%

1

.943

.909

.893

2

.890

.826

.797

3

.840

.751

.712

4

.792

.683

.636

5

.747

.621

.567

Explanation / Answer

Answer to the Question

Profitability Index=Present Value of Inflow/Initial Investment

   =$301,055/$260,000

   =1.16.

NPV of the project $41,055 and PI of the project 1.16.

Year Annual Cash Flow PVF @ 10% Present Value of Future Cash Flow 0                           (260,000.00) 1                                       (260,000.00) 1                             95,000.00 0.909                                          86,355.00 2                             95,000.00 0.826                                          78,470.00 3                             95,000.00 0.751                                          71,345.00 4                             95,000.00 0.683                                          64,885.00 NPV                                          41,055.00

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