Part Five

APPLY THE CONCEPTS: Net present value and Present value index

Sutherland Corp. is looking to invest in Project A or Project B$.$ The data surrounding each project

is provided below. Sutherland's cost of capital is $8\%.$

Project A

Project B

This project requires an initial investment of

$$175,000.$ The project will have a life of $8$

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

$$140,000.$ The project will have a life of $7$

years. Annual revenues associated with the

project will be $$107,000$ 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

$q$

$$

Amount to be invested

Net present value

Present value index:

Project A

Project B