Consider projects A and B with the following cash flows: C0 C1 C2 C3 A $ 27 + $

Question

Consider projects A and B with the following cash flows:

C0 C1 C2 C3

A $ 27 + $ 16 + $ 16 + $ 16

B 52 + 27 + 27 + 27

a-1. What is the NPV of each project if the discount rate is 10%? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Project NPV A $ B $

a-2. Which project has the higher NPV?

Project B Project A

b-1. What is the profitability index of each project? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Project Profitability index A B

Explanation / Answer

Project A Project B Year PV factor @10% Cash Flows PV of Cash flows Cash Flows PV of Cash flows Year 0                   1.0               (27.0)               (27.0)               (52.0)             (52.0) Year 1               0.909                 16.0                  14.5                 27.0               24.5 Year 2               0.826                 16.0                  13.2                 27.0               22.3 Year 3               0.751                 16.0                  12.0                 27.0               20.3 PV of Cash Inflows=                  39.8               67.1 PV of Investments                  27.0               52.0 NPV =                  12.8               15.1 Project A Project B NPV                 12.8                 15.1 Project B has a higher NPV Project A Project B PI = PV of Cash inflows/Initial Investment                   1.5                   1.3

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