The Matterhorn Corporation is trying to choose between the following two mutuall
ID: 2651554 • Letter: T
Question
The Matterhorn Corporation is trying to choose between the following two mutually exclusive design projects:
If the required return is 12 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).)
If the required return is 12 percent and the company applies the profitability index decision rule, which project should the firm accept?
(Click to select)Project IProject II
If the required return is 12 percent, what is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
The Matterhorn Corporation is trying to choose between the following two mutually exclusive design projects:
Explanation / Answer
Answer:
1(a)
Calculation of profitability index for Project I
Cash Inflows
Year
Cash Inflow
PVF (12%)
PV
Calculation
PVF
Cash flow *PVF
1
$ 27,500.00
1/(1+0.12)^1
0.89286
$ 24,553.57
2
$ 33,000.00
1/(1+0.12)^2
0.79719
$ 26,307.40
3
$ 39,000.00
1/(1+0.12)^3
0.71178
$ 27,759.43
Present value of Cash inflows (PVCI)
$ 78,620.40
Cash Outflows
0
$ 73,000.00
1/(1+0.12)^0
1.00000
$ 73,000.00
Present value of Cash inflows (PVCO)
$ 73,000.00
Profitability Index = PVCI /PVCO
1.077
Calculation of profitability index for Project II
Cash Inflows
Year
Cash Inflow
PVF (12%)
PV
Calculation
PVF
Cash flow *PVF
1
$ 9,500.00
1/(1+0.12)^1
0.89286
$ 8,482.14
2
$ 20,500.00
1/(1+0.12)^2
0.79719
$ 16,342.47
3
$ 14,500.00
1/(1+0.12)^3
0.71178
$ 10,320.81
Present value of Cash inflows (PVCI)
$ 35,145.43
Cash Outflows
0
$ 31,000.00
1/(1+0.12)^0
1.00000
$ 31,000.00
Present value of Cash inflows (PVCO)
$ 31,000.00
Profitability Index = PVCI /PVCO
1.134
1(b)
Profitability index of Project II is higher hence Project II should be accepted
2(a)
Calculation of NPV for Project I
Cash Inflows
Year
Cash Inflow
PVF (12%)
PV
Calculation
PVF
Cash flow *PVF
0
$ (73,000.00)
1/(1+0.12)^0
1.00000
$ (73,000.00)
1
$ 27,500.00
1/(1+0.12)^1
0.89286
$ 24,553.57
2
$ 33,000.00
1/(1+0.12)^2
0.79719
$ 26,307.40
3
$ 39,000.00
1/(1+0.12)^3
0.71178
$ 27,759.43
NPV = Sum of PVs
$ 5,620.40
Calculation of profitability index for Project II
Cash Inflows
Year
Cash Inflow
PVF (12%)
PV
Calculation
PVF
Cash flow *PVF
0
$ 31,000.00
1/(1+0.12)^0
1.00000
$ 31,000.00
1
$ 9,500.00
1/(1+0.12)^1
0.89286
$ 8,482.14
2
$ 20,500.00
1/(1+0.12)^2
0.79719
$ 16,342.47
3
$ 14,500.00
1/(1+0.12)^3
0.71178
$ 10,320.81
NPV = Sum of PVs
$ 66,145.43
2(b)
NPV of Project II is higher, hence Project II should be accepted.
1(a)
Calculation of profitability index for Project I
Cash Inflows
Year
Cash Inflow
PVF (12%)
PV
Calculation
PVF
Cash flow *PVF
1
$ 27,500.00
1/(1+0.12)^1
0.89286
$ 24,553.57
2
$ 33,000.00
1/(1+0.12)^2
0.79719
$ 26,307.40
3
$ 39,000.00
1/(1+0.12)^3
0.71178
$ 27,759.43
Present value of Cash inflows (PVCI)
$ 78,620.40
Cash Outflows
0
$ 73,000.00
1/(1+0.12)^0
1.00000
$ 73,000.00
Present value of Cash inflows (PVCO)
$ 73,000.00
Profitability Index = PVCI /PVCO
1.077
Calculation of profitability index for Project II
Cash Inflows
Year
Cash Inflow
PVF (12%)
PV
Calculation
PVF
Cash flow *PVF
1
$ 9,500.00
1/(1+0.12)^1
0.89286
$ 8,482.14
2
$ 20,500.00
1/(1+0.12)^2
0.79719
$ 16,342.47
3
$ 14,500.00
1/(1+0.12)^3
0.71178
$ 10,320.81
Present value of Cash inflows (PVCI)
$ 35,145.43
Cash Outflows
0
$ 31,000.00
1/(1+0.12)^0
1.00000
$ 31,000.00
Present value of Cash inflows (PVCO)
$ 31,000.00
Profitability Index = PVCI /PVCO
1.134
1(b)
Profitability index of Project II is higher hence Project II should be accepted
2(a)
Calculation of NPV for Project I
Cash Inflows
Year
Cash Inflow
PVF (12%)
PV
Calculation
PVF
Cash flow *PVF
0
$ (73,000.00)
1/(1+0.12)^0
1.00000
$ (73,000.00)
1
$ 27,500.00
1/(1+0.12)^1
0.89286
$ 24,553.57
2
$ 33,000.00
1/(1+0.12)^2
0.79719
$ 26,307.40
3
$ 39,000.00
1/(1+0.12)^3
0.71178
$ 27,759.43
NPV = Sum of PVs
$ 5,620.40
Calculation of profitability index for Project II
Cash Inflows
Year
Cash Inflow
PVF (12%)
PV
Calculation
PVF
Cash flow *PVF
0
$ 31,000.00
1/(1+0.12)^0
1.00000
$ 31,000.00
1
$ 9,500.00
1/(1+0.12)^1
0.89286
$ 8,482.14
2
$ 20,500.00
1/(1+0.12)^2
0.79719
$ 16,342.47
3
$ 14,500.00
1/(1+0.12)^3
0.71178
$ 10,320.81
NPV = Sum of PVs
$ 66,145.43
2(b)
NPV of Project II is higher, hence Project II should be accepted.
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