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
Year 6% 10% 12% 15% 20%
1 0.943 0.909 0.893 0.870 0.833
2 1.833 1.736 1.690 1.626 1.528
3 2.673 2.487 2.402 2.283 2.106
4 3.465 3.170 3.037 2.855 2.589
5 4.212 3.791 3.605 3.353 2.991
6 4.917 4.355 4.111 3.785 3.326
7 5.582 4.868 4.564 4.160 3.605
8 6.210 5.335 4.968 4.487 3.837
9 6.802 5.759 5.328 4.772 4.031
10 7.360 6.145 5.650 5.019 4.192
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

Present value of annuity of 1 @ 10% for 7 years

$ 6,250

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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Present Value of an Annuity of $1 atCompound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.353	2.991
6	4.917	4.355	4.111	3.785	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

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