Question

Following is information on two alternative investments being considered by Tiger Co. The company requires a 6% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Project X1 $ (84,000) Project X2 $ (128,000) Initial investment Expected net cash flows in year: 27,000 37,500 62,500 63,000 53,000 43,000 a. Compute each project's net present value. b. Compute each project's profitability index. If the company can choose only one project, which should it choose? Complete this question by entering your answers in the tabs below. Required A Required B Compute each project's net present value. (Round your final answers to the nearest dollar.) Net Cash Flows Present Value of 1 at 6% Present Value of Net Cash Flows Project X 1 Year 1 Year 2 Year 3 Totals Amount invested Net present value Project X2 Year 1 Year 2 Year 3 Totals Amount invested Net present value

Answer 1

A) COMPUTATION OF NET PRESENT VALUE

	NET CASH FLOWS	PRESENT VALUE FACTOR 6%	PV OF NET CASH FLOWS
PROJECT X1
YEAR 1	27,000	0.9433	25,469
YEAR 2	37,500	0.8899	33,371
YEAR 3	62,500	0.8396	52,475
TOTAL			1,11,315
AMT INVESTED			(84,000)
NET PRESENT VALUE			27,315
PROJECT X2
YEAR 1	63,000	0.9433	59,428
YEAR 2	53,000	0.8899	47,165
YEAR 3	43,000	0.8396	36,102
TOTAL			1,42,695
AMT INVESTED			1,28,000
NET PRESENT VALUE			14,695

PROFITABILITY INDEX :

PROJECT X1 :

Profitability index = Present value of cash inflows / Initial investment

= 1,11,315 / 84,000

= 1.325

PROJECT X2 :

= 1,42,695 / 1,28,000

= 1.115

If the Tiger company has to choose only one project , then the company must choose the one with ,

* Higher NPV

* Higher profitability index

So, the company must choose PROJECT X1.