Present Value A project has estimated annual net cash flows of $11,250 for four
ID: 2437479 • Letter: P
Question
Present Value A project has estimated annual net cash flows of $11,250 for four years and is estimated to a minimum acceptable rate of return of 12%. Use the Present Value of an Annuity of Interest table below. cost $37,500. Assume $1 at Compound Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.352 2.991 6 4.917 4.355 4.111 3.784 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 Determine (1) the net present value of the project (if required, round to the nearest dollar) and (2) the dex (rounded to two decimal places). If required, use the minus sign to indicate a negative net present value (1) Net present value of the project (2) Present value index 2 more Check My Work uses remaining - 401, = 1460.5??Explanation / Answer
Annual Net Cash Flow = $11250
Project Cost = $37500
Minimum Acceptable Rate of return = 12%
(1) Net Present Value of the Project :-
PVAF for 4 years @ 12% = 3.037
Present Value of Future cash flows – Initial Project cost
Annual Net cash flow * PVAF for 4 years – Initial cost
(11250 * 3.037) – 37500
34166.25 - 37500
= -3333.75
(2)Present Value Index:-
Present value of future cash flows / Initital Investment
34166.25 / 37500
= 0.91
The PV index is less than 1
That means NPV is negative