Problem 1

Problem 1

The company has a project with a 5-year life, an initial investment of $220,000, and is expected to yield annual cash flows of $56,000. What is the present value index of the project if the required rate of return is set at 8%?

Present value index = Total present value of net cash flows / Initial investment

Calculation Steps: Note: Round total present value of net cash flows and initial investment to nearest dollar. Round present value index to two decimal places.

Question 1:

Present value index = ???????/220,000 = 1.02 (note: answer is not 223,592)

Problem 2 (tables located at the bottom)

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

Project A: This project requires an initial investment of $165,000. The project will have a life of 3 years. Annual revenues associated with the project will be $130,000 and expenses associated with the project will be $35,000.

Project B: This project requires an initial investment of $140,000. The project will have a life of 5 years. Annual revenues associated with the project will be $113,000 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.

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.

Question 2

Project AProject B

Total present value of net cash flow______________

Amount to be invested165,000 140,000

Net present value _______________

Present value Index:

Project A: ______

Project B: ______

Problem 3

The Rydell 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 $231,200. The project's life and cash flow have changed to 7 years and $47,500, respectively, while expenses have been eliminated.

Project B: Project B's revised investment is $152,400. The project's life and cash flow have changed to 6 years and $90,000 while expenses reduced slightly to $55,000.

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.

Question 3: 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?______ %

Present value of $1 (a single sum) at Compound Interest

Year 5%6%7%8%9%10%11%12%13%14%15%

10.9520.9430.9350.9260.9170.9090.9010.8930.8850.8770.870

20.9070.8900.8730.8570.8420.8260.8120.7970.7830.7690.756

30.8640.8400.8160.7940.7720.7510.7310.7120.6930.6750.658

40.8230.7920.7630.7350.7080.6830.6590.6360.6130.5920.572

50.7840.7470.7130.6810.6500.6210.5930.5670.5430.5190.497

60.7460.7050.6660.6300.5960.5640.5350.5070.4800.4560.432

70.7110.6650.6230.5830.5470.5130.4820.4520.4250.4000.376

80.6770.6270.5820.5400.5020.4670.4340.4040.3760.3510.327

90.6450.5920.5440.5000.4600.4240.3910.3610.3330.3080.284

100.6140.5580.5080.4630.4220.3860.3520.3220.2950.2700.247

Present value of an Annuity of $1 at Compound Interest

Year 5%6%7%8%9%10%11%12%13%14%15%

10.9520.9430.9350.9260.9170.9090.9010.8930.8850.8770.870

21.8591.833 1.8081.7831.759 1.736 1.713 1.690 1.668 1.647 1.626

32.7232.6732.6242.5772.531 2.4872.4442.4022.3612.322 2.283

43.5463.4653.3873.312 3.2403.170 3.102 3.037 2.9742.9142.855

54.3294.2124.1003.9933.8903.7913.6963.605 3.517 3.4333.352

65.0764.9174.7674.6234.4864.3554.231 4.111 3.998 3.889 3.784

75.7865.5825.3895.2065.0334.8684.7124.5644.4234.2884.160

86.4636.2105.971 5.7475.535 5.3355.1464.9684.7994.6394.487

97.1086.8026.5156.247 5.9955.759 5.5375.3285.1324.9464.772

107.7227.360 7.0246.7106.4186.145 5.8895.6505.4265.2165.019