Question

Stanton Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $490,000, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $90,000 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $510,000, will have a useful life of 11 years, and will produce net annual cash flows of $77,000 per year. Evaluate the success of the project. Assume a discount rate of 10%

Answer 1

Estimate on start of the Project:
	Year	Value Flows	Present Factor @ 10%	Present Value
Initial Cost	0	$ -4,90,000	1	$       -4,90,000
Cash Inflows	1-9	$      90,000	5.75902	$ 5,18,312
Net Present Value				$ 28,312
Th project is having Positive Net Present Value.
Estimate after 1 year:
	Year	Value Flows	Present Factor @ 10%	Present Value
Initial Cost	0	$ -5,10,000	1	$       -5,10,000
Cash Inflows	1-11	$      77,000	6.49506	$ 5,00,120
Net Present Value				$ -9,880
Th project is having Negative Net Present Value.
By comparing above estimates, On starting of the project Net Present Value showing a positive result whereas after 1 year the estimated Net Present Value is Negative. Overall results are - The project is not at success,