## Answers

Project A

Net annual cash inflow = revenues – expenses = 130000-35000 = $95000

Present value of cash inflows = Net annual cash inflow*PVIFA(i=8%, n=8) = 95000*5.74664 = $545931

Project B

Net annual cash inflow = revenues – expenses = 109000-60000 = $49000

Present value of cash inflows = Net annual cash inflow*PVIFA(i=8%, n=7) = 49000*5.20637 = $255112

Project A | Project B | |

Total present value of net cash flows | 545931 | 255112 |

Amount to be invested | 167500 | 137500 |

Net present value | $378431 | $117612 |

Present value index: | ||

Project A | 3.26 | |

Project B | 1.86 |

Present value index = Total present value of net cash flows /Amount to be invested

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