Platoon Company is performing a post-audit of a project that was estimated to co
ID: 2589473 • Letter: P
Question
Platoon Company is performing a post-audit of a project that was estimated to cost $420,000, have a useful life of 6 years with a zero salvage value, and result in net cash inflows of $100,000 per year. After the investment was in operation for a year, revised figures indicate that it actually cost $470,000, will have a 9-year useful life, and will produce net cash inflows of $77,000. The present value of an annuity of 1 for 6 years at 10% is 4.355 and for 9 years is 5.759.
Calculate the net present value based on the actual amounts.
Determine whether the project should have been accepted.
Platoon Company is performing a post-audit of a project that was estimated to cost $420,000, have a useful life of 6 years with a zero salvage value, and result in net cash inflows of $100,000 per year. After the investment was in operation for a year, revised figures indicate that it actually cost $470,000, will have a 9-year useful life, and will produce net cash inflows of $77,000. The present value of an annuity of 1 for 6 years at 10% is 4.355 and for 9 years is 5.759.
Calculate the net present value based on the actual amounts.
Determine whether the project should have been accepted.
Explanation / Answer
Answer: NPV based on actual amounts:
Actual cost of the project : $470000
useful life : 9 years
Net cash inflow per year : $77000
Present value of the actual cash inflows : 77000*5.759 = $443443
Acual investment : $470000
NPV : -$26557
Based on the actual amounts NPV project should not be accepted. As it is coming out to be negative.