Brief Exercise 26-6 Quillen Company is performing a post-audit of a project comp

Question

Brief Exercise 26-6 Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $245,066, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $45,000 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $252,782, will have a total useful life of 11 years, and will produce net annual cash flows of $38,000 per year.Click here to view PV table. indica earlick hers to Evaluate the success of the project. Assume a discount rate of 10%. (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 O decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Original estimate net present value Revised estimate net present value The project a success

Explanation / Answer

1) original estimate net present value (NPV) = present value of future cash flow - initial investment

Present value of future cash flow =45000×10%,9 years annuity factor

=45000×5.759=259155

initial investment =245066

NPV =259155-245066=14089

2)Revised estimate net present value (NPV) =present value of revised future cash flow -Revised initial investment

present value of revised future cashflow =38000×10%, 11 years annuity factor

=38000×6.495=246810

revised initial investment =252782

NPV =246810-252782 = -5972

*) From these analysis and results we can find that this "project is not a success".

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