Question
In: Accounting
Net Present Value A project has estimated annual net cash flows of $6,250 for seven years...
Net Present Value
A project has estimated annual net cash flows of $6,250 for seven years and is estimated to cost $45,000. Assume a minimum acceptable rate of return of 10%. Use the Present Value of an Annuity of $1 at Compound Interest table below.
| 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 | 3.353 | 2.991 |
| 6 | 4.917 | 4.355 | 4.111 | 3.785 | 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 |
Determine (a) the net present value of the project and (b) the present value index. If required, use the minus sign to indicate a negative net present value.
| Net present value of the project (round to the nearest dollar) | $ |
| Present value index (rounded to two decimal places) |
Solutions
Expert Solution
| (a) | Net Present Value | $ -14,575 | ||||||||||
| Working: | ||||||||||||
| Present value of cash inflows | = | Annual Cash inflows | x | Present value of annuity of 1 @ 10% for 7 years | = | $ 6,250 | x | 4.868 | = | $ 30,425 | ||
| Less Cost | $ 45,000 | |||||||||||
| Net Present Value | $ -14,575 | |||||||||||
| (b) | Present value index | 0.68 | ||||||||||
| Working: | ||||||||||||
| Present value index | = | Present value of cash inflows | / | Cost | ||||||||
| = | $ 30,425 | / | $ 45,000 | |||||||||
| = | 0.68 | |||||||||||
ekkarill92 answered 6 months agoRelated Solutions
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