Question

A project has estimated annual net cash flows of $96,200 for four years and is estimated to cost $315,500. Assume a minimum acceptable rate of return of 10%. Use the Present Value of an Annuity of $1 at Compound Interest table below.

Answer 1

The value of the Present Value Index is 0.97.

According to the statement

we have to find that the present value index with the given information.

So, For this purpose, we know that the

The ratio of the present value index of a project to the initial outlay required for it. The index is an efficiency measure for investment decisions under capital rationing.

From the given information:

A project has estimated annual net cash flows of $96,200 for four years and is estimated to cost $315,500. Assume a minimum acceptable rate of return of 10%. Use the Present Value of an Annuity of $1

And

Here we use the formula is:

Present Value Index = Present value of net cash inflows/Present value of net cash outflows

And

The net present value of the project is -$10,558.94.

The present value index is 0.97.

the value become

Present Value Index = Present value of net cash inflows/Present value of net cash outflows

Then  

substitute the values

then

Present Value Index = 96200*3.16/315,500

Then

Present Value Index =0.97

Hence, The value of the Present Value Index is 0.97.

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