omework: Chapter 8 Homework Score: 0 of 1 pt P 8-36 (similar to) 13 of 16 (4 com

Question

omework: Chapter 8 Homework Score: 0 of 1 pt P 8-36 (similar to) 13 of 16 (4 complete) HW Score: 21.88 Ques Fabulous Fabricators needs to decide how to allo cate space in its production facility this year. It is considering the following contracts: Contract NPV $1.97 million $1.04 million $1.48 million a. What are the profitability indexes of the projects? Use of Facility 100% 58% 42% b. What should Fabulous Fabricators do? a. What are the profitability indexes of the projects? The profitability index for contract A is(Round to two decimal places) Enter your answer in the answer box and then click Check Answer parts remaining Clear Al rk-help/study-guide-for-fundamentals-of-corporate-finance-2nd-edition-solutions 97801 Windows

Explanation / Answer

Answer a.

Contract A:

Profitability Index = NPV / Use of Facility
Profitability Index = 1.97 / 100%
Profitability Index = 1.97

Contract B:

Profitability Index = NPV / Use of Facility
Profitability Index = 1.04 / 58%
Profitability Index = 1.79

Contract C:

Profitability Index = NPV / Use of Facility
Profitability Index = 1.48 / 48%
Profitability Index = 3.52

Answer b.

Contract B and Contract C provide a total NPV of $2.52 million which is higher than NPV of Contract A.

So, Fabulous Fabricators should select Contract B and Contract C.

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