Consider projects A and B with the following cash flows: What is the NPV of each

Question

Consider projects A and B with the following cash flows: What is the NPV of each project if the discount rate is 10% [Do not calculations. Round your answers to 2 decimal places.) Which project has the higher NPV? Project A Project B What is the profitability index of each project? ( Do not round intermediate calculations. Round your answers to 2 decimals places.) Which project has the higher profitability index? Project A Project B Which project is most attractive to a firm that can raise an unlimited amount of funds investment projects? Project A Project B Which project is most attractive to a firm that is limited in the funds it can raise? Project A Project B

Explanation / Answer

a-1

a-2 Project A

b-1 PI A=64.66/42=1.54

   PI B=89.53/67=1.33

b-2 Project A has higher PI

c-1 Project A

c-2 Project A

CF 0 1 2 3 A -42 26 26 26 B -67 36 36 36 Discount factor 1.1 1.21 1.331 PV 0 1 2 3 A -42 23.64 21.49 19.53 B -67 32.73 29.75 27.05 NPV A 22.66 B 22.53

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