Norwood, Inc., which has a hurdle rate of 14%, is considering three different in
ID: 2498233 • Letter: N
Question
Norwood, Inc., which has a hurdle rate of 14%, is considering three different independent investment opportunities. Each project has a seven-year life. The annual cash flows and initial investment for each of the projects are as follows: (Future Value of $1, Present Value of $1, Future Value Annuity of $1,Present Value Annuity of $1.)
What is the present value of the annual cash flows for each of the three projects? (Round "PV Factor" to 4 decimal places. Round your answers to the nearest dollar amount.)
What is the net present value of each of the projects? (Round "PV Factor" to 4 decimal places. Round your intermediate calculations and final answers to the nearest dollar amount.)
What is the profitability index of each of the projects? (Round "PV Factor" to 4 decimal places. Round the intermediate calculation to the nearest dollar amount. Round your answers to 2 decimal places.)
Norwood, Inc., which has a hurdle rate of 14%, is considering three different independent investment opportunities. Each project has a seven-year life. The annual cash flows and initial investment for each of the projects are as follows: (Future Value of $1, Present Value of $1, Future Value Annuity of $1,Present Value Annuity of $1.)
Explanation / Answer
a) Present value of annual cash flows for the projects are as follows:-
Project A
Project B
Project C
b) Net Present Value of projects are as follows:-
Project A
Project B
Project C
C) Profitability Index = Present Value of Future Cash Flows / Intial Investment Required
Decision Rule : Accept a project if the profitability index is greater than 1, stay indifferent if the profitability index is zero and don't accept a project if the profitability index is below 1.
Project A
Profitability Index = 564,212 / 321,000 = 1.76
Project B
Profitability Index = 517,255 / 301,000 = 1.72
Project C
Profitability Index = 470,255 / 231,000 = 2.04
d) According to profitability index method Norwood should priortize the investments as :-
C, A, B
According to NPV approach:-
A, C, B
Year Cash Inflow Pv factor @ 14% Present value 1-7 131,570 4.2883 564,212Related Questions
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