Question

Following is information on two alternative investments being considered by Jolee Company. 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 A $ (186,325) Project B $ (151,960) Initial investment Expected net cash flows in: Year 1 Year 2 Year 3 Year 4 Year 5 50,000 53,000 83,295 80,400 71,000 27,000 60,000 64,000 68,000 30,000 a. For each alternative project compute the net present value. b. For each alternative project compute the profitability index. If the company can only select one project, which should it choose?

Answer 1

A O calculation of Net Present value is Project Year cash flow X P.V factor - Present value so,ooo oglu3 47150 53000 0.889 4Z117 8349S 0.800 69968 80400 0.792 636 78 71000 0.747 53038 Present Value of future cash flow 280951 Initial Investment I (18 6345) Net Present value 194626 Project Bo Cashflow Pov factor Present value &7000 O. 943 25461 60,000 0.889 53340 64000 0.840 53760 68000 0.792 53856 30,000 I 0.707 & 2410 Pive of future cash flow 208827 Thital Investment lis1960 - net present Value 568 67 on the basis of Net Present value Company Should choose project A.

Profitability Index formula: Pevecaf future cash flow Shital Investment Project A = 280951/ 1863&5 = 1.507 Project Be - 2088 27/ 151960 = 1.374 company should choose Project A.