Whispering Winds Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $575,000, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $107,000 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $625,000, will have a useful life of 11 years, and will produce net annual cash flows of $94,000 per year. Evaluate the success of the project. The company’s discount rate is 10%. (Use the above table.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,275.) Original estimate Revised estimate Net present value $enter a dollar amount rounded to 0 decimal places $enter a dollar amount rounded to 0 decimal places The original project was select an option . **Table 3: Present Value of 1**This table displays the present value of 1 for various interest rates (from 4% to 15%) over a range of periods (n=1 to n=20). Each cell in the table represents the present value of 1 unit of currency at a specific interest rate and number of periods. This is a useful financial tool for determining how much a future sum is worth in today's terms.**Present Value at Different Interest Rates:**- The columns are labeled by interest rates: 4%, 5%, 6%, 7%, 8%, 9%, 10%, 11%, 12%, and 15%.- The rows (Periods) range from 1 to 20.For example, the present value of 1 unit at a 6% interest rate over 5 periods is 0.74726.---**Table 4: Present Value of an Annuity of 1**This table shows the present value of an annuity of 1, again for various interest rates (from 4% to 15%) over a range of payments (n=1 to n=20). An annuity is a series of equal payments made at regular intervals. This table helps in calculating how much a series of future payments is worth today.**Annuity Present Value at Different Interest Rates:**- The columns are similarly labeled by interest rates: 4%, 5%, 6%, 7%, 8%, 9%, 10%, 11%, 12%, and 15%.- The rows (Payments) also range from 1 to 20.For example, the present value of an annuity of 1 at a 7% interest rate over 5 payments is 4.10020.These tables are essential for financial planning, investment analysis, and determining the present value of future cash flows. **Present Value of an Annuity of 1 Table**This table is used to determine the present value of an annuity of 1, given different interest rates and payment periods. The rows represent the number of payments (n), and the columns represent the interest rates, ranging from 4% to 15%. Each cell in the table contains the present value factor for the corresponding interest rate and number of payments.**Understanding the Table:**- The vertical axis (rows) lists the number of payments, starting from 1 up to 20.- The horizontal axis (columns) lists different interest rates: 4%, 5%, 6%, 7%, 8%, 9%, 10%, 11%, 12%, and 15%.- Each cell contains the present value factor for a given number of payments and a specified interest rate. **Application:**To find the present value of an annuity, multiply the annuity amount by the present value factor from the table that matches the desired number of payments and discount rate.**Example Exercise:**- Evaluate the success of a project using a company's discount rate of 10%.- Use the table to identify the present value factor for the desired number of payments at a 10% rate.- Multiply this factor by the annuity amount to find the net present value.**Instructions:**1. Locate the number of payments in the left column.2. Move across the row to the column under the desired interest rate.3. Use the present value factor provided.4. Calculate the net present value using: \[ \text{Net Present Value (NPV)} = \text{Annuity} \times \text{Present Value Factor} \]5. Round factor values to 5 decimal places and final answers to 0 decimal places.This tool is essential for evaluating investment opportunities and calculating financial obligations over time.

Answered: Whispering Winds Company is performing…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Whispering Winds Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $575,000, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $107,000 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $625,000, will have a useful life of 11 years, and will produce net annual cash flows of $94,000 per year.

Evaluate the success of the project. The company’s discount rate is 10%. (Use the above table.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,275.)

		Original estimate		Revised estimate
Net present value		$enter a dollar amount rounded to 0 decimal places		$enter a dollar amount rounded to 0 decimal places

The original project was select an option .

**Table 3: Present Value of 1**

This table displays the present value of 1 for various interest rates (from 4% to 15%) over a range of periods (n=1 to n=20). Each cell in the table represents the present value of 1 unit of currency at a specific interest rate and number of periods. This is a useful financial tool for determining how much a future sum is worth in today's terms.

**Present Value at Different Interest Rates:**

- The columns are labeled by interest rates: 4%, 5%, 6%, 7%, 8%, 9%, 10%, 11%, 12%, and 15%.
- The rows (Periods) range from 1 to 20.

For example, the present value of 1 unit at a 6% interest rate over 5 periods is 0.74726.

---

**Table 4: Present Value of an Annuity of 1**

This table shows the present value of an annuity of 1, again for various interest rates (from 4% to 15%) over a range of payments (n=1 to n=20). An annuity is a series of equal payments made at regular intervals. This table helps in calculating how much a series of future payments is worth today.

**Annuity Present Value at Different Interest Rates:**

- The columns are similarly labeled by interest rates: 4%, 5%, 6%, 7%, 8%, 9%, 10%, 11%, 12%, and 15%.
- The rows (Payments) also range from 1 to 20.

For example, the present value of an annuity of 1 at a 7% interest rate over 5 payments is 4.10020.

These tables are essential for financial planning, investment analysis, and determining the present value of future cash flows.

**Present Value of an Annuity of 1 Table**

This table is used to determine the present value of an annuity of 1, given different interest rates and payment periods. The rows represent the number of payments (n), and the columns represent the interest rates, ranging from 4% to 15%. Each cell in the table contains the present value factor for the corresponding interest rate and number of payments.

**Understanding the Table:**

- The vertical axis (rows) lists the number of payments, starting from 1 up to 20.
- The horizontal axis (columns) lists different interest rates: 4%, 5%, 6%, 7%, 8%, 9%, 10%, 11%, 12%, and 15%.
- Each cell contains the present value factor for a given number of payments and a specified interest rate.

**Application:**

To find the present value of an annuity, multiply the annuity amount by the present value factor from the table that matches the desired number of payments and discount rate.

**Example Exercise:**

- Evaluate the success of a project using a company's discount rate of 10%.
- Use the table to identify the present value factor for the desired number of payments at a 10% rate.
- Multiply this factor by the annuity amount to find the net present value.

**Instructions:**

1. Locate the number of payments in the left column.
2. Move across the row to the column under the desired interest rate.
3. Use the present value factor provided.
4. Calculate the net present value using:
\[
\text{Net Present Value (NPV)} = \text{Annuity} \times \text{Present Value Factor}
\]
5. Round factor values to 5 decimal places and final answers to 0 decimal places.

This tool is essential for evaluating investment opportunities and calculating financial obligations over time.

Expert Solution

Step 1

The current value of a stream of payments from the project, investments, etc. is determined by using Net Present Value. If the Net present value is positive, it is advisable to accept the proposal or to make the investment whereas if the Net present value is negative, it shows that the rate of return will be lower than the discount rate hence it is not advisable to accept the proposal or to make the investment.

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