The company has a project with a 5 year life that requires an initial investment of $200,000, and is expected to yield annual cash flows of $62,500 What is the net present value of the project if the required rate of return is set at 10 Calculation Steps Present Value of an Annuity of $1 at Compound Interest Net Present Value ( $ x ) $ Note Round your answer to the nearest whole dollar What NPV does the previous calculation yield $ PART 2 When funds for capital investments are limited, projects can be ranked using a present value index A project with a negative net present value will have a present value index below 1 0 Also, it is important to note that a project with the largest net present value may, in fact, return a lower present value per dollar invested Let's look at an example of how to determine the present value index 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 $58,500 Whathat is the present value index of the project if the required rate of return is set at 6 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 Note Round total present value of net cash flows and initial investment to nearest dollar Round present value index to two decimal places Present value index $ $ PART 3 A company has a project with a 5 year life, requiring an initial investment of $219,600, and is expected to yield annual cash flows of $55,000 What is the internal rate of return IRR Factor a Investment b Annual cash flows c a IRR Factor This is the factor which youll use on the table for the present value of an annuity of $1 dollar in order to find the percentage which corresponds to the internal rate of return b Investment This is the present value of cash outflows associated with a project If all of the investment is up front at the beginning of the project, the present value factor is 1 000 c Annual Cash Flows This is the amount of cash flows to be received annually as a result of the project Calculation Steps Present Value of an Annuity of $1 at Compound Interest IRR Factor $ , rounded to 6 decimals $ The calculated factor corresponds to which percentage in the present value of ordinary annuity table PART 4 APPLY THE CONCEPTS Net present value and Present value index Ewing Manufacturing is looking to invest in Project A or Project B The data surrounding each project is provided below Ewing's cost of capital is 11 Project A Project B This project requires an initial investment of $172,500 The project will have a life of 6 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 $135,000 The project will have a life of 4 years Annual revenues associated with the project will be $109,000 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 PART 5 APPLY THE CONCEPTS Internal rate of return The Ewing purchasing department has made revisions to their costs and annual cash flows for Project A and Project B, as outlined below Project A Project B Project A's revised investment is $249,600 The project's life and cash flow have changed to 6 years and $54,000, respectively, while expenses have been eliminated Project B's revised investment is $107,000 The project's life and cash flow have changed to 5 years and $82,500 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 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

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The company has a project with a 5-year life that requires an initial investment of $200,000, and is expected to yield annual cash flows of

The company has a project with a 5-year life that requires an initial investment of $200,000, and is expected to yield annual cash flows of $62,500. What is the net present value of the project if the required rate of return is set at 10%?

Calculation Steps

Present Value of an Annuity of $1 at Compound Interest.

Net Present Value =

(________

x________

)

$_________

Note: Round your answer to the nearest whole dollar.

What NPV does the previous calculation yield? $_________________

PART 2

When funds for capital investments are limited, projects can be ranked using a present value index. A project with a negative net present value will have a present value index below 1.0. Also, it is important to note that a project with the largest net present value may, in fact, return a lower present value per dollar invested.

Let's look at an example of how to determine the present value index.

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 $58,500. Whathat is the present value index of the project if the required rate of return is set at 6%?


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.

Present value index =	$________	= ____________
	$________

PART 3

A company has a project with a 5-year life, requiring an initial investment of $219,600, and is expected to yield annual cash flows of $55,000. What is the internal rate of return?

IRR Factor^a	=	Investment^b
		Annual cash flows^c

^aIRR Factor: This is the factor which youll use on the table for the present value of an annuity of $1 dollar in order to find the percentage which corresponds to the internal rate of return.
	^bInvestment: This is the present value of cash outflows associated with a project. If all of the investment is up front at the beginning of the project, the present value factor is 1.000.
		^cAnnual Cash Flows: This is the amount of cash flows to be received annually as a result of the project.

Calculation Steps

Present Value of an Annuity of $1 at Compound Interest.

IRR Factor =	$_________	= _________, rounded to 6 decimals
	$__________

The calculated factor corresponds to which percentage in the present value of ordinary annuity table?

%_________

PART 4

APPLY THE CONCEPTS: Net present value and Present value index

Ewing Manufacturing is looking to invest in Project A or Project B. The data surrounding each project is provided below. Ewing's cost of capital is 11%.
Project A	Project B
This project requires an initial investment of $172,500. The project will have a life of 6 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 $135,000. The project will have a life of 4 years. Annual revenues associated with the project will be $109,000 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		_______

PART 5

APPLY THE CONCEPTS: Internal rate of return

The Ewing purchasing department has made revisions to their costs and annual cash flows for Project A and Project B, as outlined below.
Project A	Project B
Project A's revised investment is $249,600. The project's life and cash flow have changed to 6 years and $54,000, respectively, while expenses have been eliminated.	Project B's revised investment is $107,000. The project's life and cash flow have changed to 5 years and $82,500 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.

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? %_______