The following is information regarding two alternative investments being conside
ID: 2472030 • Letter: T
Question
The following is information regarding two alternative investments being considered by Bob fruit company. the company requires a 10% return on investments. the equipment for project A has no salvage value; the equipment for project B has a salvage value of $25,000 (not included in the cash flows indicated below)
PROJECT A. PROJECT B
initial Investment. ($175,000) ($145,000)
EXPECTED NET CASH FLOWS IN YEAR:
1. 65,000. 32,000
2. 65,000. 50,000
3. 65,000. 66,000
4. 65,000. 72,000
5. 65,000. 29,000
A) calculate the net present value and the profitability index for project A.
B) Calculate the payback period for Project B.
C) calculate the net present value and the profitability index for project B.
Explanation / Answer
A) Project A:
Net present value = Present value of cash inflows - Initial investment =
$ 65,000 × 3.7908 -$175,000 = $ 71,402
Profitability index = Present value of cash inflows / Initial investment = 246,402 / 175,000 = 1.41
B) Payback period for Project B:
Payback period = 2 + 145,000 - 82,000 / 148,000 - 82,000 = 2.95 years
C) Project B
Net present value = 32,000×0.909+50,000×0.826+66,000x0.751+72,000x0.683+54,000×0.621 - 145,000 = 29,088 + 41,300 + 49,566 + 49,176+ 33,534 -145,000 = $57,664
Profitability index = 202,664 /145,000 = 1.40
Year Cash inflows Cumulative cash inflows 1 32,000 32,000 2 50,000 82,000 3 66,000 148,000Related Questions
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