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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