Part Five
APPLY THE CONCEPTS: Net present value andPresent value index
| Sutherland Inc.is looking to invest in Project A or Project B. The datasurrounding each project is provided below. Sutherland's cost ofcapital is 8%. |
Project A | Project B |
| This project requires aninitial investment of $165,000. The project will have a life of 8years. Annual revenues associated with the project will be $130,000and expenses associated with the project will be$35,000. | This project requires aninitial investment of $137,500. The project will have a life of 7years. Annual revenues associated with the project will be $115,000and expenses associated with the project will be$60,000. |
Calculate the net present value and the presentvalue index for each project using the present value tablesprovided 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 morefavorable profit prospects? Project A
- Both are favorable
- Project A
- Project B
- Can't determine
Based upon the present value index, which project is rankedhigher? Project A
- Both are favorable
- Project A
- Project B
- Can't determine
