Your task is to analyze two mutually exclusive projects: Year Cash Flow Project
ID: 2644755 • Letter: Y
Question
Your task is to analyze two mutually exclusive projects:
Year Cash Flow Project X Cash Flow Project Z
-0- -400,000 -50,000
1 25,000 20,000
2 60,000 15,000
3 60,000 20,000
4 540,000 20,000
Whichever project you chose, if any, you require a 15% return on your investment.
] Using the profitability index criterion, which investment should you chose? Why?
Explanation / Answer
1) Project X Project Y Particulars Time PVF Amount PV Amount PV Cash Outflows - 1.0000 (400,000.00) (400,000.00) (50,000.00) (50,000.00) PV of cash outflows (400,000.00) (50,000.00) Cash Inflows(Dividend) 1 0.8696 25,000.00 21,739.13 20,000.00 17,391.30 Cash Inflows(Dividend) 2 0.7561 60,000.00 45,368.62 15,000.00 11,342.16 Cash Inflows(Dividend) 3 0.6575 60,000.00 39,450.97 20,000.00 13,150.32 Cash Inflows(Dividend) 4 0.5718 540,000.00 308,746.75 20,000.00 11,435.06 PV of Cash Inflows - 415,305.48 53,318.85 NPV 15,305.48 3,318.85 Project X should be selected as it has higher NPV
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