Project Q has an initial cost of $211,415 and projected cash flows of $121,300 i
ID: 2642864 • Letter: P
Question
Project Q has an initial cost of $211,415 and projected cash flows of $121,300 in Year 1 and $176,300 in Year 2. Project R has an initial cost of $415,000 and projected cash flows of $187,500 in Year 1 and $236,600 in Year 2. The discount rate is 8.5 percent and the projects are independent. Which project(s), if either, should be accepted based on its profitability index value?
a Accept both Project Q and R b Reject both Project Q and R c Accept Project Q and reject Project R d Accept Project R and reject Project Q e Accept either Project R or Project Q, but not bothExplanation / Answer
Project R
Year Cash Flows Discount factor @ 8.5% Dsicounted Cash Flows
1 187500 0.922 172,875.00
2 236600 0.849 200,873.40
Net Present value = Discounted cash flows - Initial Investment = 373748.40 - 415000.00 =- $41,251.60
Project Q
Year Cash Flows Discount factor @ 8.5% Dsicounted Cash Flows
1 121300 0.922 111,838.60
2 176300 0.849 149,678.70
Net Present value = Discounted cash flows - Initial Investment = 261517.30 - 211415.00 = $50,102.30
The Net Present value is positive for Project Q whereas it is negative for Proect R. So, Accept Project Q and reject Project R.
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