Question

The management of Villa Corporation is considering the purchase of a new machine costing $300,000. The residual value for the machine is estimated to be $0. The company’s desired rate of return is 8%. Estimated income and cash flow date for the project are as follows:

Year	Operating Income	Net Cash Flow
1	$60,000	$80,000
2	$60,000	$80,000
3	$60,000	$80,000
4	$60,000	$80,000
5	$60,000	$80,000

The present value index (rounded to two decimal places) for this investment is:

	A.	1.19
	B.	none of these
	C.	1.12
	D.	.89
	E.	0.84

Answer 1

Correct answer—(B) None of these

Correct Present value index is 1.06 as calculated below

Year	Annual Cash Flow	NPV Factor at 8% Discount rate	Discounted Cash Flow
1	$      80,000.00	0.92593	$             74,074
2	$      80,000.00	0.85734	$             68,587
3	$      80,000.00	0.79383	$             63,507
4	$      80,000.00	0.73503	$             58,802
5	$      80,000.00	0.68058	$             54,447
Present value of Cash Inflows			$         3,19,417
Less: Initial Investment			$         3,00,000
Net Present value			$             19,417
Profitability index			1.06