Reference no: EM132967274
Question: Present Value IndexLet's look at an example of how to determine the present value index.
When funds for capital investments are limited, projects can be ranked using a present value index. A project with a negative net present value will have a present value index below 1.0. Also, it is important to note that a project with the largest net present value may, in fact, return a lower present value per dollar invested.
The company has a project with a 5-year life, an initial investment of $195,000, and is expected to yield annual cash flows of $58,000. Whathat is the present value index of the project if the required rate of return is set at 6%?
Present value index=Total present value of net cash flows
Initial investment
Calculation Steps
Note: Round total present value of net cash flows and initial investment to nearest dollar. Round present value index to two decimal places.
Present value index = $ ???______ = ????
$195.000
Total Present value of net cash flows and in order to get the answer for the Present Value index.
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