These are two questions that I missed on my last quiz and my instructor has not

Question

These are two questions that I missed on my last quiz and my instructor has not explained where I went wrong. Is there a detailed way to show me how the solution was reached? I want to know before my next exam.


The net present value has been computed for Proposals P and Q. Relevant data are as follows:

Proposal P Proposal Q
Amount to be invested $180,000 $475,000
Total present value of net cash flow 190,800 484,500
Net present value 10,800 9,500

Determine the present value index for each proposal.

Explanation / Answer

The ratio of NPV of the project to the initial outlay required for it.The index is an efficiency measure for investment decisions under Capital rationing. The formula for calculating the Present value index is Present value index = Net present value / Initial outlay For Proposal-P: Present value Index = $10,800 / $180,000 = 0.06 For proposal-Q: Present value Index = $9,500 / $475,000 = 0.02 A ratio of more than 1 indicates a profitable investment, while a ratio of less than 1 indicates one that will likely result in a loss. A present value index is most often used when one is making investment decision and only has a finite amount of risk capital.

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