Net Present Value A project has estimated annual net cash flows of $76,000 for f

Question

Net Present Value

A project has estimated annual net cash flows of $76,000 for five years and is estimated to cost $287,661. Assume a minimum acceptable rate of return of 12%. Use the Present Value of an Annuity of $1 at Compound Interest table below.

Determine (1) the net present value of the project (if required, round to the nearest dollar) and (2) the present value index (rounded to two decimal places). If required, use the minus sign to indicate a negative net present value.

Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.352 2.991 6 4.917 4.355 4.111 3.784 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192

Explanation / Answer

(1)

Net present value of the project

= Present value of the annual cash flows - Initial investment

= ($76,000 x 3.605) - $287,661

= -$13,681

(2)

Present value index

= Present value of future cash flows/Initial investment

= ($76,000 x 3.605)/$287,661

= 0.95

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