Part Five

APPLY THE CONCEPTS: Net present value and Present value index

Sutherland Inc. is looking to invest in Project A or Project B. The data surrounding each project is provided below. Sutherland's cost of capital is 8%.
Project A	Project B
This project requires an initial investment of $165,000. The project will have a life of 8 years. Annual revenues associated with the project will be $130,000 and expenses associated with the project will be $35,000.	This project requires an initial investment of $137,500. The project will have a life of 7 years. Annual revenues associated with the project will be $115,000 and expenses associated with the project will be $60,000.

Calculate the net present value and the present value index for 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	$		$
Amount to be invested
Net present value	$		$
Present value index:
Project A
Project B

Based upon net present value, which project has the more favorable profit prospects? Project A

• Both are favorable
• Project A
• Project B
• Can't determine

Based upon the present value index, which project is ranked higher? Project A

• Both are favorable
• Project A
• Project B
• Can't determine