Question

Item4

10points

eBookHint

Print

Check my workCheck My Work button is now enabled5

Item 4

Item 4 10 points

Following is information on two alternative investments being considered by Jolee Company. The company requires a 10% 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					Project B
Initial investment		$	(171,325	)			$	(151,960	)
Expected net cash flows in:
Year 1			45,000					26,000
Year 2			52,000					43,000
Year 3			74,295					50,000
Year 4			90,400					75,000
Year 5			57,000					28,000

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?


Project A Initial Investment $ 171,325 Chart Values are Based on: Year Cash Inflow X PV Factor = Present Value Initial Investment Year Cash Inflow Project B $ 151,960 X PV Factor = Present Value

Answer 1

1. Calculation of present value of inflow

Year	PV factor	Project A		Project B
		Cash flow	present value	cash flow	Present value
1	0.909	45000	$40905	26000	$23634
2	0.826	52000	$42952	43000	$35518
3	0.751	74295	$55796	50000	$37550
4	0.683	90400	$61743	75000	$51225
5	0.621	57000	$35397	28000	$17388
			$236793		$165315

NPV = present value of inflow - outflow today

Project A = $236793 - $171325 = $65468

Project B = $165315 - $151960 = $13355

2. Profitability index = present value of inflows / outflow

Project A = $236793/$171325 = 1.38

Project B = $165315/$151960 = 1.09

Company should choose project A.

Feel free to ask any queries..

Also plz upvote it means a lot... Thank you