Answer:
PV Index = 1.158
Explanation:
Present value index is the ratio of discounted cash flows of the project divided by initial outlay required for the project thus first we calculate the Present Values for Investment B
Present value factors @ 12% for year 0, 1, 2, 3, 4 respectively.
1
0.893
0.797
0.712
0.636
Net Present Value = -9000 + (5000 * 0.893) + (4000 * 0.797) + (3000 * 0.712) + (1000 * 0.636)
NPV = $1425
Present value Index = NPV / Initial investment = 1425/9000 = 0.158
This can be interpreted as 1 + 0.158 = 1.158,
1 being the initial investment. You can also choose not to subtract the initial outlay when calculating NPV.
Hope that helps.
Answer:
Consider the following calculations
Explanation:
We need to work out the net after tax cash flows for each of the five years of the project, which are calculated as follows:
Net annual cash flows = annual cash inflows – annual cash outflows
INVESTMENT A = 15000- (5000+5000+5000+4000) = -4000
INVESTMENT B = 9000- (5000+4000+3000+1000) =-4000
HURDLE RATE = 12 %
The present value factor for 4 years annuity is 3.0373
INVESTMENT A
Present value of future net cash flows = 3.0373* $4000 = $12149.39
INVESTMENT B
Present value of future net cash flows = 3.0373* $4000 = $12149.39
HENCE PRESENT VALUE IS GREATER THAN INITIAL FLOW.. HENCE IT SHOULD BE ACCEPTED
