Consider projects A and B with the following cash flows: C 0 C 1 C 2 C 3 A --$43
ID: 2743388 • Letter: C
Question
Consider projects A and B with the following cash flows:
C0 C1 C2 C3
A --$43 + $27 + $27 + $27
B -- $68 + 37 + 37 + 37
a-1 what is the NPV of each project if the discount rate is 10%? (Do not round intermediate calcualtions. Round yur answers to 2 decimal places.)
Project NPV
A $ _______
B $________
a-2 Which project has the higher NPV?
Project A _________
Project B_________
b-1 What us the profitability index of each project? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Project Profitability index
A _________
B _________
b-2 Which project has the higher profitability index?
Project A or B
c-1 Which project is most attractive to a firm that can raise an unlimited amount of funds to pay for its investment projects?
Project A or B
c-2 which project is most attractive to a firm that is limited in the funds it can raise?
Project A, B or Both
Explanation / Answer
Project: A
Year
Cash flow
PV Factor @ 10%
PV
0
(43)
1.0000
(43.00)
1
27
0.9091
24.55
2
27
0.7837
21.16
3
27
0.6756
18.24
NPV
20.95
Project: B
Year
Cash flow
PV Factor @ 10%
PV
0
(68)
1.0000
(68.00)
1
37
0.9091
33.64
2
37
0.7837
29.00
3
37
0.6756
25.00
NPV
19.63
a-1.
Project
NPV
A
20.95
B
19.63
a-2. Project A has higher NPV.
b-1 . Profitability index for project A = NPV + Initial Investment/ Initial Investment
= 20.95 + $ 43 /$ 43 = 63.95/43 = 1.487209
Profitability index for project B = NPV + Initial Investment/ Initial Investment
= 19.63 + $ 68 /$ 68 = 63.95/43 = 1.28868
b-2 Project A has higher Higher Profitability index.
c-1 Which project is most attractive to a firm that can raise an unlimited amount of funds to pay for its investment projects?
Project B
c-2 which project is most attractive to a firm that is limited in the funds it can raise?
Project A
Year
Cash flow
PV Factor @ 10%
PV
0
(43)
1.0000
(43.00)
1
27
0.9091
24.55
2
27
0.7837
21.16
3
27
0.6756
18.24
NPV
20.95
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