The Matterhorn Corporation is trying to choose between the following two mutuall
ID: 2748894 • Letter: T
Question
The Matterhorn Corporation is trying to choose between the following two mutually exclusive design projects:
If the required return is 10 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 10 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 10 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
Cash Flow-I Year Cash Flows Discount@10% Present value of cash Flows 0 -86000 1 -86000 1 35900 0.909090909 32636.36364 2 46000 0.826446281 38016.52893 3 26000 0.751314801 19534.18482 Present value of cash Inflows 90187.07739 Profitability Index (present value of cash flows/outflows) 90187.07/86000 1.048686946 Cash Flow -II Year Cash Flows Discount@10% Present value of cash Flows 0 -53000 1 -53000 1 12000 0.909090909 10909.09091 2 33500 0.826446281 27685.95041 3 27500 0.751314801 20661.15702 Present value of cash Inflows 59256.19835 Profitability Index (present value of cash flows/outflows) 59256.19/53000 1.118041478 Decision: Highest profitability index will be selected thus, Cash flow II will be selected. Cash Flow-I Year Cash Flows Discount@10% Present value of cash Flows 0 -86000 1 -86000 1 35900 0.909090909 32636.36364 2 46000 0.826446281 38016.52893 3 26000 0.751314801 19534.18482 Net Present Value 4187.077385 Cash Flow-II Year Cash Flows Discount@10% Present value of cash Flows 0 -53000 1 -53000 1 12000 0.909090909 10909.09091 2 33500 0.826446281 27685.95041 3 27500 0.751314801 20661.15702 Net Present Value 6256.198347 Decision Based on NPV, Cash Flow II with highest NPV will be selected
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