Part Five

APPLY THE CONCEPTS: Net present value and Present value index

Underwood Inc. is looking to invest in Project A or Project B. The data surrounding each project is provided below. Underwood's cost of capital is 11%.
Project A	Project B
This project requires an initial investment of $172,500. 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 $113,000 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? Project A

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

Part Six

APPLY THE CONCEPTS: Internal rate of return

The Underwood 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 $250,700. The project's life and cash flow have changed to 7 years and $51,500, respectively, while expenses have been eliminated.	Project B's revised investment is $119,800. The project's life and cash flow have changed to 6 years and $82,500 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? %