Part Five

APPLY THE CONCEPTS: Net present value and Present value index

Sutherland Inc. 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 $167,500. The project will have a life of 3 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 5 years. Annual revenues associated with the project will be $105,000 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
Amount to be invested
Net present value
Present value index:
Project A
Project B

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

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