Net Present Value A project has estimated annual net cash flows of $6,250 for th

Question

Net Present Value

A project has estimated annual net cash flows of $6,250 for three years and is estimated to cost $30,000. Assume a minimum acceptable rate of return of 15%. 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

Present value of inflows=$6250*Present value of annuity factor(15%,3)

=$6250*2.283

=$14268.75

1.NPV=Present value of inflows-Present value of outflows

=14268.75-30,000

=($15731)(Negative).

2.PI=Present value of inflows/Present value of outflows

=14268.75/30,000

=0.48(Approx).

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