Part Five

APPLY THE CONCEPTS: Net present value and Present value index

Krause Manufacturing is looking to invest in Project A or Project B. The data surrounding each project is provided below. Krause's cost of capital is 11%.
Project A	Project B
This project requires an initial investment of $165,000. The project will have a life of 6 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 $130,000. The project will have a life of 4 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	?		?
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?

Part Six

APPLY THE CONCEPTS: Internal rate of return

The Krause purchasing department has made revisions to their costs and annual cash flows for Project A and Project B, as outlined below.
Project A	Project B
Project A's revised investment is $228,800. The project's life and cash flow have changed to 7 years and $47,000, respectively, while expenses have been eliminated.	Project B's revised investment is $152,400. The project's life and cash flow have changed to 6 years and $90,000 while expenses reduced slightly to $55,000.

Compute the internal rate of return factor for Project A and Project B and then identify each project's corresponding percentage from the PV ordinary annuity table.

Note: Enter the IRR factor, to 5 decimal places.

Project A: The calculated IRR factor is_____________ and this value corresponds to which percentage in the present value of ordinary annuity table? __________________%

Project B: The calculated IRR factor is___________________ and this value corresponds to which percentage in the present value of ordinary annuity table? ____________________%