NPV, PI choosing projects Sams Pizza is evaluating two different purchasing opti
ID: 2622482 • Letter: N
Question
NPV, PI choosing projects
Sams Pizza is evaluating two different purchasing options. Option A involves purchasing two additional ovens and Option B involves overhauling the entire kitchen. Option A could be done quickly but option B would be state of the art and could increase business significantly. These two options are mutually exclusive and the required rate of returnis 10%
Year Option A Option B
0 -20,000 -60,000
1 25,000 70,000
Calculate NPV
Calculate the PI
Which project should be selected? How should the decision be made? What if Sam's Pizza has capital rationing?
Explanation / Answer
NPV of Option A=25000/1.1-20000
=$2727.28
NPV of Option B=70000/1.1-60000
=$3636.36
Profitablity Index of A=22727.28/20000
=1.136
Profitablity Index of B=63636.36/60000
=1.06
We see that Option B is more viable when compared in NPV while Option A is preferrable baseed on PI
the decision is to be based on PI as more profit is achieved from the investment
If SAm's PIzza has capital rationing then Option A is to be selected
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.