The Matterhorn Corporation is trying to choose between the following two mutuall

Question

The Matterhorn Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (I) Cash Flow (II) 0 –$80,000 –$38,000 1 31,000 13,000 2 40,000 27,500 3 46,000 21,500

Requirement 1: (a) If the required return is 14 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).) Profitability index Project I Project II (b) If the required return is 14 percent and the company applies the profitability index decision rule, which project should the firm accept? Requirement 2: (a) If the required return is 14 percent, what is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Net present value Project I $ Project II $ (b) If the company applies the NPV decision rule, which project should it take?

Explanation / Answer

Profitable Index of Project 1

formula = PI= PV of cash inflows/ PV of cash outflows= 88997/80000=1.11

project 2 PI =47061/38000=1.24

The PI of project 2 is greater than project 1 hence project to is acceptable

NPV of the projects =

NPV of project 1= $ -80000+$27187+$30760+$31050=$ 8897

NPV of project 2= $ -38000+$ 11401+21147.50+$ 14512.50=$ 9061

NPV of project 2 is greater than project 1 hence project 2 is acceptable

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