Problem 9-16 Problems with Profitability Index [LO1, 7] The Sloan Corporation is
ID: 2716481 • Letter: P
Question
Problem 9-16 Problems with Profitability Index [LO1, 7]
The Sloan Corporation is trying to choose between the following two mutually exclusive design projects:
Year Cash Flow
(I) Cash Flow
(II)
0 –$ 62,000 –$ 18,200
1 33,000 9,800
2 33,000 9,800
3 33,000 9,800
a-1
If the required return is 12 percent, what is the profitability index for both projects? (Do not round intermediate calculations. Round your answers to 3 decimal places, e.g., 32.161.)
Profitability
Index
Project I
Project II
a-2
If the company applies the profitability index decision rule, which project should the firm accept?
Project I
Project Il
b-1
What is the NPV for both projects? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
NPV
Project I $
Project II $
b-2
If the company applies the NPV decision rule, which project should it take?
Project I
Project II
Explanation / Answer
Statemnet showing Cash flows Project1 Project2 Particulars Time PVf@12% Amount PV Amount PV Cash Outflows - 1.00 (62,000.00) (62,000.00) (18,200.00) (18,200.00) PV of Cash outflows (62,000.00) (18,200.00) Cash inflows 1.00 0.8929 33,000.00 29,464.29 9,800.00 8,750.00 Cash inflows 2.00 0.7972 33,000.00 26,307.40 9,800.00 7,812.50 Cash inflows 3.00 0.7118 33,000.00 23,488.75 9,800.00 6,975.45 PV of Cash Inflows 79,260.43 23,537.95 NPV 17,260.43 5,337.95 PI = PV of Cash Inflows/ Initial Invt 1.28 1.29 Project 2 is better and accepted on basis of PI Project 1 is better and accepted on basis of NPV
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