Given:

APPLY THE CONCEPTS:Net present value and Present value index

Underwood Corp. is looking to invest in Project A or Project B. The data surrounding each project is provided below. Underwood's cost of capital is 10%.

Project A.

This project requires an initial investment of $170,000.

The project will have a life of 3 years.

Annual revenues associated with the project will be $130,000andexpenses associated with the project will be $35,000.

Project B

This project requires an initial investment of $130,000.

The project will have a life of 5 years. Annual revenues associated with the project will be $115,000andexpenses associated with the project will be $60,000.

Calculate thenet present valueand thepresent value indexfor 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 $236, 265.00 $208,505.00

Amount to be invested: $170,000.00 $130,000.00

Net present value $ 66,265.00 $ 78,505.00

Present Value Index: 1.39 1.60

APPLY THE CONCEPTS:Internal rate of return

The Underwood purchasing department has made revisions to their costs and annual cash flows for Project A and Project B, as outlined below.

Project A

Project A's revised investment is $238,100.

The project's life and cash flow have changed to 6 years and $51,500, respectively,

while expenses have been eliminated.

Project B

Project B's revised investment is $126,400.

The project's life and cash flow have changed to 5 years and $87,500

while expenses reduced slightly to $55,000.

Question needing solving:

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?________________%