Question

The Matterhom Corporation is trying to choose between the following two mutually exclusive design projects: Cash Flow (II) -$24,000 8,000 14,500 12,800 Cash Flow (I) -$65,000 24,000 29,000 36,000 Year Requirement 1: (a) If the required return is 11 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 Project Il (b) If the required return is 11 percent and the company applies the profitability index decision rule, which project should the firm accept? Project II Requirement 2: (a) If the required return is 11 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? O123

Answer 1

Solution :

a.If the required return is 11 percent, the Profitability Index for the projects is as follows :

Project I = 1.100

Project II = 1.181

If the required return is 11 percent, and the company applies the profitability index decision rule, the firm should accept Project II which has a higher Profitability Index when compared to Project I.

b.If the required return is 11 percent, the NPV for the projects is as follows :

Project I = $ 6,481.56

Project II = $ 4,334.98

If the required return is 11 percent, and the company applies the NPV decision rule, the firm should accept Project I,

which has a higher NPV when compared to Project II.

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

27.11.2019 Microsoft Excel FILE НOME INSERT PAGE LAYOUT FORMULAS DATA REVIEW VIEW A B C E F G Н Statement showing calculation of NPV and Profitability Index of Project- 1 SI.No. Particulars PV Factor@ 11 % Discounted Cash Flows Amount Year (2) (4) (1) (3) (1) (3) 1.0000 $ 1 Cash outflow Year 0 65,000.00 Total of Cash Outflows (A) 0 65,000.0000 $ 0.9009 $ 65,000.0000 4 2. $ 3 Cash Inflow Year 1 5 24,000.00 21,621.6216 4 Cash Inflow Year 2 $ 0.8116 $ 29,000.00 6 2 23,537.0506 26,322.8897 5 Cash Inflow Year 3 $ 0.7312 S 7 36,000.00 3 Total of discounted cash Inflows (B) Net Present Value of the Project = (B) - (A) Net Present Value of the Project (Rounded off to two decimal places) Profitability Index- (B)/(A) Profitability Index ( Rounded off to three decimal places) б 71,481.5619 6,481.5619 7 10 6,481.56 11 1.0997 1.100 12 10 13 14 Statement showing calculation of NPV and Profitability Index of Project II Year 15 Sl.No. Particulars Amount (1) $ PV Factor@ 11 % Discounted Cash Flows |(2) |(3) (4) (1)* (3) 1.0000 $ 16 1 Cash outflow Year 0 24,000.00 Total of Cash Outflows (A) 17 0 24,000.0000 24,000.0000 18 2. $ 0.9009 $ 3 Cash Inflow Year 1 19 8,000.00 1 7,207.2072 4 Cash Inflow Year 2 0.8116 S 11,768.5253 20 14,500.00 2 5 Cash Inflow Year 3 $ 0.7312 S 9,359.2497 21 12,800.00 3 Total of discounted cash Inflows (B) 28,334.9822 22 6 Net Present Value of the Project (B) - (A) 23 7 4,334.9822 Net Present Value of the Project (Rounded off to two decimal places) 24 4,334.98 Profitability Index - (B)/(A) Profitability Index ( Rounded off to three decimal places) 1.1806 25 9 1.181 26 10 27 28 LON оо о