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Net Present Value A project has estimated annual net cash flows of $6,250 for seven years and...

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Accounting

Net Present Value

A project has estimated annual net cash flows of $6,250 forseven years and is estimated to cost $45,000. Assume a minimumacceptable rate of return of 10%. Use the Present Value ofan Annuity of $1 at Compound Interest table below.

Present Value of an Annuity of $1 atCompound Interest
Year6%10%12%15%20%
10.9430.9090.8930.8700.833
21.8331.7361.6901.6261.528
32.6732.4872.4022.2832.106
43.4653.1703.0372.8552.589
54.2123.7913.6053.3532.991
64.9174.3554.1113.7853.326
75.5824.8684.5644.1603.605
86.2105.3354.9684.4873.837
96.8025.7595.3284.7724.031
107.3606.1455.6505.0194.192

Determine (a) the net present value of the project and (b) thepresent value index. If required, use the minus sign to indicate anegative net present value.

Net present value of the project (round to the nearestdollar)$
Present value index (rounded to two decimalplaces)

Answer & Explanation Solved by verified expert
4.5 Ratings (941 Votes)

(a) Net Present Value $ -14,575
Working:
Present value of cash inflows = Annual Cash inflows x Present value of annuity of 1 @ 10% for 7 years = $       6,250 x 4.868 = $       30,425
Less Cost $       45,000
Net Present Value $     -14,575
(b) Present value index            0.68
Working:
Present value index = Present value of cash inflows / Cost
= $   30,425 / $ 45,000
=            0.68

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