Part Five

APPLY THE CONCEPTS:Net present value and Present value index

Rydell Inc. is looking to invest in Project A or Project B. The data surrounding each project is provided below. Rydell's cost of capital is 11%.Project A

Project B

This project requires an initial investment of $170,000. The project will have a life of 6 years. Annual revenues associated with the project will be $130,000andexpenses associated with the project will be $35,000.This project requires an initial investment of $135,000. The project will have a life of 4 years. Annual revenues associated with the project will be $113,000andexpenses associated with the project will be $60,000.

Calculate thenet present valueand thepresent value indexfor 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 AProject BTotal present value of net cash flow$$Amount to be investedNet present value$$Present value index:Project AProject B

Based upon net present value, which project has the more favorable profit prospects?Project A

Based upon the present value index, which project is ranked higher?Project A