Question

APPLY THE CONCEPTS: Net present value and Present value index

Sutherland Industries is looking to invest in Project A or Project B. The data surrounding each project is provided below. Sutherland's cost of capital is 10%.
Project A	Project B
This project requires an initial investment of $172,500. The project will have a life of 3 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 5 years. Annual revenues associated with the project will be $105,000 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

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

Feedback

Subtract the expenses from the revenues to determine net cash flow for each year. Since this is an annuity cash flow, use the appropriate table to look up the present value factor for the project life and required rate of return.

Part Six

APPLY THE CONCEPTS: Internal rate of return

The Sutherland purchasing department has made revisions to their costs and annual cash flows for Project A and Project B, as outlined below.
Project A	Project B
Project A's revised investment is $210,100. The project's life and cash flow have changed to 5 years and $54,000, respectively, while expenses have been eliminated.	Project B's revised investment is $127,100. The project's life and cash flow have changed to 6 years and $82,500 while expenses reduced slightly to $55,000.

Compute the internal rate of return factor for Project A and Project B and then identify each project's corresponding percentage from the PV ordinary annuity table.

Note: Enter the IRR factor, to 5 decimal places.

Project A: The calculated IRR factor is  and this value corresponds to which percentage in the present value of ordinary annuity table? %

Project B: The calculated IRR factor is  and this value corresponds to which percentage in the present value of ordinary annuity table? %

Answer 1

Answer is given below