Question

Following is information on two alternative investments being considered by Jolee Company. The company requires a 8% 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 $(190, 325) Project B $(159,960) Initial investment Expected net cash flows in: Year 1 Year 2 Year 3 Year 4 Year 5 46,000 46,000 75,295 82,400 67,000 33,000 44,000 62,000 77,000 39,000 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

% Project A Initital investment 190325 Chart Values are based on I = Year Cash flows * PV Factor = Present Value 1 46000 * 0.9259 = 42591 46000 0.8573 = 39436 75295 0.7938 59769 41 82400 0.7350 = 60564 5 67000 * 0.6806 = 45600 247961 WN Present Value of cash inflows Present Value of Cash outflows Net Present Value 247961 190325 57636

Project B Initital investment 159960 Chart Values are Based on I= 8% Year Cash flows * PV Factor = Present Value 33000 * 0.9259 = 30555 2 44000) * 0.8573) = 37721 62000 * 0.7938 = 49216 77000 0.7350 = 56595 39000 * 0.6806 = 26543 200630 بر ایجاب | جم Present Value of cash inflows Present Value of Cash outflows Net Present Value 200630 159960 40670

Profitability Index Choose Numerator : Choose Denominator Present Value of Cash Initial investment flows 247961 190325 200630 159960 Profitability Index 1.30 1.25 Project A Project B