Drinkwater Company has a choice of two investment alternatives. The present valu

Question

Drinkwater Company has a choice of two investment alternatives. The present value of cash inflows and outflows for the first alternative is $90,000 and $84,600, respectively. The present value of cash inflows and outflows for the second alternative is $229,000 and $222,900, respectively.

Calculate the net present value of each investment opportunity.

      

Calculate the present value index for each investment opportunity. (Round your answers to 2 decimal places.)

     

Drinkwater Company has a choice of two investment alternatives. The present value of cash inflows and outflows for the first alternative is $90,000 and $84,600, respectively. The present value of cash inflows and outflows for the second alternative is $229,000 and $222,900, respectively.

Explanation / Answer

Solution -

Note 1 - Net present value (NPV) is the difference between Present value cash inflows & Present Value of Cash Outflow.

Note 2 - The present value index (PVI) is the present value of all incoming cash flows from an investment divided by the Present value of Outflow. If the ratio is more than one the Investment is likely to be profitable. More the ratio higher is the Profit as per this index.

Below is the net present value & present value index for both investment opportunity.

First alternative Second alternative A Present value outflows $84,600 $222,900 B Present value inflows $90,000 $229,000 C Net present value (NPV) (B-A) $5,400 $6,100 D Present value index (B/A) 1.0638 1.0274

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