The Matterhorn Corporation is trying to choose between the following two mutuall

Question

The Matterhorn Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (I) Cash Flow (II) 0 $91,000 $59,000 1 40,900 12,500 2 51,000 38,500 3 31,000 32,500 Requirement 1: (a) If the required return is 14 percent, what is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 3 decimal places (e.g., 32.161).) Profitability index Project I Project II (b) If the required return is 14 percent and the company applies the profitability index decision rule, which project should the firm accept? Requirement 2: (a) If the required return is 14 percent, what is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Net present value Project I $ Project II $ (b) If the company applies the NPV decision rule, which project should it take?

Explanation / Answer

rquirement 1:

a)

PV of cash flows of I = 40900/1.14 + 51000/1.14^2 + 31000/1.14^3 = 96044.1539367

profitability index of I = 96044.1539367/91000 = 1.055

PV of cahs flows of II = 12500/1.14 + 38500/1.14^2 + 32500/1.14^3 =62525.9864034

profitability index of II = 62525.9864034/59000 = 1.060

b)

it should choose project II

requirement 2:

NPV of project I = -91000 + 96044.1539367 = 5044.15

NPV of project II = -59000 + 62525.986 = 3525.99

b)

we choose project I

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