Drinkwater Company has a choice of two investment alternatives. The present valu

Question

Drinkwater Company has a choice of two investment alternatives. The present value of cash inflows and outflows for the first alternative is $98,000 and $91,700, respectively. The present value of cash inflows and outflows for the second alternative is $221,000 and $214,000, respectively.

Required a. Calculate the net present value of each investment opportunity.

Alternative 1=

Alternative 2=

b. Calculate the present value index for each investment opportunity. (Round your answers to 2 decimal places.)

Alternative 1=

Alternative 2=

c. Indicate which investment will produce the higher rate of return.

Alternative 1

Alternative 2

Explanation / Answer

a)

Alternative 1:

Net present value = present value of cash inflows - present value of cash outflows

Net present value = 98000-91700

Net present value = 6300

Alternative 2:

Net present value = present value of cash inflows - present value of cash outflows

Net present value = 221000-214000

Net present value = 7000

b)

Alternative 1:

Present value index = present value of cash inflows/ present value of cash outflows

Present value index = 98000/91700

Present value index = 1.07

Alternative 2:

Present value index = present value of cash inflows/ present value of cash outflows

Present value index = 221000/214000

Present value index = 1.03

c. Indicate which investment will produce the higher rate of return.

Alternative 1

Note : Since Alternative 1 PI is greater than Alternative 2

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