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Vaughn Company is performing a post-audit of a project completed one year ago. The initial estimates...

Vaughn Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $254,000, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $44,700 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $264,000, will have a total useful life of 11 years (including the year just completed), and will produce net annual cash flows of $38,100 per year. Click here to view PV table.

Evaluate the success of the project. Assume a discount rate of 9%. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answers to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Original estimate net present value		$
Revised estimate net present value		$

The project

a. ( is not)

b. ( is )

a success.

Expert Solution

A) Original estimate net present value is calculated as follows:

Original estimate net present value = Total present value - Initial Investment

= $ 44,700 * PVIFA (9%,9 )

= $ 44,700 * PVIFA (5.99525) - $254,000

= $267,987.54 - $254,000

= $13,987.54

B) Revised estimate net present value is calculated as follows:

Original estimate net present value = Total present value - Initial Investment

= $ 38,100 * PVIFA (9%,11) - $264,000

= $ 38,100 * PVIFA (6.80519) - $264,000

= $259,277.76 - $264,000

= (4,722.24)

The project is not success because revised estimate net present value is negative as compared to the original estimate net present value

ekkarill92 answered 1 year ago

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