6:52 PM 51% edugen.wileyplus.com Assignment Gradebook ORION Downloadable eTextbo

Question

6:52 PM 51% edugen.wileyplus.com Assignment Gradebook ORION Downloadable eTextbook ent CALCULATOR FULL SCREEN PRINTER VERSION BACK Problem 10.43 You are analyzing two proposed capital investments with the following cash flows Year Project X ProjectY 0 $20,000-$20,000 7,470 7,470 7,470 7,470 12,630 5,660 6,360 1,920 4 The cost of capital for both projects is 10 percent. Calculate the profitability index (PI) for each project. (Do not round discount factors. Round intermediate calculations to 2 decimal places, e.g. 15.25 and final answer to 4 decimal places, e.g. 1.2527.) The PI for project X is and the PI for project Y is Which project, or projects, should be accepted if you have unlimited funds to invest? If you have unlimited funds you should invest in Which project should be accepted if they are mutually exclusive? If they are mutually exclusive you should invest in LINK TO TEXT INTERACTIVE TUTORIAL

Explanation / Answer

Question 1). Solution :-

Profitability index (PI) = Present value of cash inflows / Present value of cash outflow.

Project X :-

Present value of cash inflows = 12630 / (1.10)1 + 5660 / (1.10)2 + 6360 / (1.10)3 + 1920 / (1.10)4

= 12630 / 1.10 + 5660 / 1.21 + 6360 / 1.331 + 1920 / 1.4641

= 11481.82 + 4677.69 + 4778.36 + 1311.39

= $ 22249.26

Present value of cash outflow = $ 20000.

Profitability index (PI) of Project X = 22249.26 / 20000

= 1.1125 (approx).

Project Y :-

Present value of cash inflows = 7470 * [ 1 - (1.10)-4 ] / 0.10

= 7470 * [ 1 - 0.68301 ] / 0.10

= 7470 * 0.31699 / 0.10

= $ 23679.15 (approx).

Present value of cash outflow = $ 20000.

Profitability index (PI) of Project Y = 23679.15 / 20000

= 1.1840 (approx).

Conclusion :-

Question 2). Answer :- If there are unlimited funds to invest in then the investment should be made in Project X as well as Project Y because both these projects (project X and project Y) have their profitability index (PI) greater than the 1.

Question 3). Answer :- If the projects are mutually exclusive then the investment should be made in project Y only i.e., The project Y should be selected because of the higher profitability index than the project X.

Profitability index (PI) of Project X 1.1125 (approx). Profitability index (PI) of Project Y 1.1840 (approx).

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