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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Two projects haw an identical net present value of $9,000. Are both projects equal in desirability? Explain.

To determine

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Present value index:

Present value index is a technique, which is used to rank the proposals of the business.  It is used by the management when the business has more investment proposals, and limited fund.

The present value index is computed as follows:

Present value index =Total present value of net cash flowAmount to be invested

To explain: whether both projects are equal in desirability, when the two projects have an identical net present value of $9,000.

Explanation

The net present values of both projects are favorable to invest, but the business should consider the cash outflow of the investment. Because the present value index can be vary for both projects.

For example, Project A required an investment of $10,000, and Project B required an investment of $100,000. The present value indexes would be calculated as net present value divided by the initial investment...

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