Question

For calculation purposes, use 5 decimal places as displayed in the factor table provided

Brief Exercise 27-06

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Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $244,000, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $46,600 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $256,000, will have a total useful life of 11 years (including the year just completed), and will produce net annual cash flows of $40,300 per year. Click here to view PV table.

Evaluate the success of the project. Assume a discount rate of 11%. (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		$

Answer 1

Original Estimate Net Present Value = $ 14,027

Revised Estimate Net Present Value = ($5,877)

Explanation :

Calculate the Original Estimate Net Present Value :
Particulars	Year(s)	Amount Of Cash flow	11 % Factor	Present Value of Cash flow
Annual Cash Flow	1-9 Years	$ 46,600	5.53705	$258,027    {$46,600*5.53705}
Initial Investment	Now	($244,000)	1	($244,000)
Net Present Value (Original Estimate )				$ 14,027
Present value of Annuity of $ 1 ,N= 9 Years , i= 11 % is 5.53705
Calculate the Revised Estimate Net Present Value :
Particulars	Year(s)	Amount Of Cash flow	11 % Factor	Present Value of Cash flow
Annual Cash Flow	1-11 Years	$ 40,300	6.20652	$250,123    {$40,300*6.20652}
Initial Investment	Now	($256,000)	1	($256,000)
Net Present Value (Revised Estimate )				($5,877)
Present value of Annuity of $ 1 ,N= 11 Years , i= 11 % is 6.20652
Conclusion :
The Project is not a Success Because of Revised Estimate Net Present Value is Negative i.e ($5,877)