Question

The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of projects A, B, and C as follows:

Year	Project A			Project B			Project C
0	−	$	175,000	−	$	325,000	−	$	175,000
1			115,000			210,000			125,000
2			115,000			210,000			95,000

  

Suppose the relevant discount rate is 8 percent per year.
  
a. Compute the profitability index for each of the three projects. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

  

	Profitability index
Project A
Project B
Project C

  

b. Compute the NPV for each of the three projects. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

  

	NPV
Project A	$
Project B	$
Project C	$

  

c. Suppose these three projects are independent. Which project(s) should Amaro accept based on the profitability index rule?
  

	Project A
	Project B
	Project C
	Project A, Project B, Project C
	Project A, Project B
	Project A, Project C
	Project B, Project C

  
d. Suppose these three projects are mutually exclusive. Which project(s) should Amaro accept based on the profitability index rule?
  

	Project B
	Project A
	Project C
	Project A, Project B
	Project A, Project B, Project C
	Project A, Project C
	Project B, Project C

  
e. Suppose Amaro’s budget for these projects is $500,000. The projects are not divisible. Which project(s) should Amaro accept?
  

	Project A
	Project B
	Project C
	Project A, Project B, Project C
	Project B, Project C
	Project B, Project A
	Project A, Project C

Answer 1

Year	A	B	C
0	175,000	325,000	175,000
1	115,000	210,000	125,000
2	115,000	210,000	95,000
a.Profitability Index = Present value of cash inflows/Initial Investment
	Present value of cash inflows	Initial Investment	PI
Project A	205075.4458	175,000	1.17185969
Project B	374485.5967	325,000	1.152263374
Project C	197187.9287	175,000	1.126788164
b.NPV = Present value of cash inflows - Present value of cash outflows
	NPV
Project A	30,075.45
Project B	49,485.60
Project C	22,187.93
Based on PI, Projects A,B and C since PI greater than 1
d. Project A
e.Project B, Project A since maximum NPV