In: Accounting
Part Five
APPLY THE CONCEPTS: Net present value and Present value index
Sutherland Inc. is looking to invest in Project A or Project B. The data surrounding each project is provided below. Sutherland's cost of capital is 8%. | |
Project A |
Project B |
This project requires an initial investment of $165,000. The project will have a life of 8 years. Annual revenues associated with the project will be $130,000 and expenses associated with the project will be $35,000. | This project requires an initial investment of $137,500. The project will have a life of 7 years. Annual revenues associated with the project will be $115,000 and expenses associated with the project will be $60,000. |
Calculate the net present value and the present value index for each project using the present value tables provided below.
Present Value of $1 (a single sum) at Compound Interest.
Present Value of an Annuity of $1 at Compound Interest.
Note: | |
• | Use a minus sign to indicate a negative NPV. |
• | If an amount is zero, enter "0". |
• | Enter the present value index to 2 decimals. |
Project A | Project B | |||
Total present value of net cash flow | $ | $ | ||
Amount to be invested | ||||
Net present value | $ | $ | ||
Present value index: | ||||
Project A | ||||
Project B |
Based upon net present value, which project has the more favorable profit prospects? Project A
Based upon the present value index, which project is ranked higher? Project A