Morch 21, 2018 ot 00:54 frm Exercise 11-10 NPV and profitability index LO P3 Fel

Question

Morch 21, 2018 ot 00:54 frm Exercise 11-10 NPV and profitability index LO P3 Fellowing is information on two alternative appropriate factor(s) from the tobles provided. lowestments being considered by JO Company. The company requires o 10% return from its investments. evots, ween emom od Nardi, (use Project A Project B for nitial investment 174,325 Expected net cosh fows in 47,000 45,000 86,295 77400 68,000 32,000 44,000 2000 24,000 a. For each aternotive project compute the net present value. b. For eoch alternative project compute the profitability index. If the compony con only select one project, which should it choose? 2.79 ises b... nt of C. centro d- ter pel.. 21

Explanation / Answer

Project A a) Year Cash Flow P.V Factor 8% for 4 Years Present Value 0 $                                             (174,325.00) 1 $               (174,325.00) 1 $                                                 47,000.00 0.909 $                    42,723.00 2 $                                                 45,000.00 0.826 $                    37,170.00 3 $                                                 86,295.00 0.751 $                    64,807.55 4 $                                                 77,400.00 0.683 $                    52,864.20 5 $                                                 68,000.00 0.621 $                    42,228.00 Present Value of Cash Inflow=($42723+$37170+$64807.55+52864.20+$42228) $                  239,792.75 Present Value of Cash Outflow= $               (174,325.00) NPV=Present Value of cash inflow-Present Value of Cash outflow $                    23,239.75 Project B Year Cash Flow P.V Factor 8% for 4 Years Present Value 0 $                                             (143,960.00) 1 $               (143,960.00) 1 $                                                 32,000.00 0.909 $                    29,088.00 2 $                                                 44,000.00 0.826 $                    36,344.00 3 $                                                 52,000.00 0.751 $                    39,052.00 4 $                                                 73,000.00 0.683 $                    49,859.00 5 $                                                 24,000.00 0.621 $                    14,904.00 Present Value of Cash Inflow=($29088+$36344+$39052+$49859+$14904) $                  169,247.00 Present Value of Cash Outflow= $               (143,960.00) NPV=Present Value of cash inflow-Present Value of Cash outflow $                    10,383.00 Profitability Index b) Projects Present Value of Cash Inflow=(A) Present Value of cash outflow=(B) Profitability Index=(Present Value of cash inflow/Present Value of cash outflow)=(A)/(B) A $                                               239,792.75 $                                            174,325.00 $                               1.38 B $                                               169,247.00 $                                            143,960.00 $                               1.18 If the company can choose only one projet,it should select Project A because its NPV and Profitability Index is higher than project B

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