APPLY THE CONCEPTS: Net present value and Present value index Sutherland Engineering is looking to invest in Project A or Project B. The data surrounding each project is provided below. Sutherland's cost of capital is 10%. Project A Project B This project requires an initial investment of This project requires an initial investment of $172,500. The project will have a life of 3 $137,500. The project will have a life of 5 years. Annual revenues associated with the years. Annual revenues associated with the project will be $130,000 and expenses associated with the project will be $35,000. 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 236,256 x 185,749 x Amount to be invested 172,500 137,500 V Net present value 50,507 x 48,249 x Present value index: Project A 1.37 Project B 1.35 V
APPLY THE CONCEPTS: Net present value and Present value index Sutherland Engineering is looking to invest in Project A or Project B. The data surrounding each project is provided below. Sutherland's cost of capital is 10%. Project A Project B This project requires an initial investment of This project requires an initial investment of $172,500. The project will have a life of 3 $137,500. The project will have a life of 5 years. Annual revenues associated with the years. Annual revenues associated with the project will be $130,000 and expenses associated with the project will be $35,000. 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 236,256 x 185,749 x Amount to be invested 172,500 137,500 V Net present value 50,507 x 48,249 x Present value index: Project A 1.37 Project B 1.35 V
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 3PB: Net present value method, present value index, and analysis for a service company First United Bank...
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Transcribed Image Text:APPLY THE CONCEPTS: Net present value and Present value index
Sutherland Engineering is looking to invest in Project A or Project B. The data surrounding each
project is provided below. Sutherland's cost of capital is 10%.
Project A
Project B
This project requires an initial investment of
This project requires an initial investment of
$172,500. The project will have a life of 3
$137,500. The project will have a life of 5
years. Annual revenues associated with the
years. Annual revenues associated with the
project will be $130,000 and expenses
project will be $109,000 and expenses
associated with the project will be $35,000.
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
236,256 x
$ 185,749 x
Amount to be invested
172,500
137,500 V
Net present value
50,507
X
48,249 x
Present value index:
Project A
1.37
Project B
1.35
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