Cori\'s Sausage Corporation is trying to choose between the following two mutual

Question

Cori's Sausage Corporation is trying to choose between the following two mutually exclusive design projects:

  

   

If the required return is 11 percent, what is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)

  

  

If the company applies the profitability index decision rule, which project should the firm accept?

  

What is the NPV for each project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

  

If the company applies the NPV decision rule, which project should it take?

Year Cash Flow (I) Cash Flow (II) 0 –$ 67,000 –$ 17,700 1 28,000 9,550 2 28,000 9,550 3 28,000 9,550

Explanation / Answer

NPV of Cash Inflow Project (I)=28000/(1.11^1)+28000/(1.11^2)+28000/(1.11^3)=68424.01

NPV of Cash Inflow Project (II)=9550/(1.11^1)+9550/(1.11^2)+9550/(1.11^3)=23337.48

(a1) Profitability Index Project (I) = Cash Inflow/Outflow=68424.01/67000=1.021

Profitability Index Project (II) = Cash Inflow/Outflow=23337.48/17700=1.318

(a2) Project-II as the Profitability Index is higher.

(b1) NPV Project(I)=68424.01-67000=1424.01

NPV Project(II)=23337.48-17700=5637.48

(b2) Project (II) as the NPV is higher.

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