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Part Five APPLY THE CONCEPTS: Net present value and Present value index Sutherland Inc. is looking...

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

  • Both are favorable
  • Project A
  • Project B
  • Can't determine

Based upon the present value index, which project is ranked higher?   Project A

  • Both are favorable
  • Project A
  • Project B
  • Can't determine

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