Question

roller company has a choice of two investment alternatives. The present value of cash inflows and outflows for the first alternative is $125,000 and $100,000, respectively. The present value of cash inflows and outflows for the second alternative is $300,000 and $262,500, respectively.

a. calculate the net present value of each investment opportunity

b. calculate the present value index for each investment opportunity

c. indicate which investment will produce the higher rate of return

Exercise 10-7A Using the present value index Rolla Company has a choice of two investment alternatives. The present value of cash inflows and outflows for the first alternative is $125,000 and $100,000, respectively. The present value of cash inflows and outflows for the second alternative is $300,000 and $262,500, respectively. Required Round your computation to two decimal points. Calculate the net present value of each investment opportunity. b. Calculate the present value index for each investment opportunity. Indicate which investment will produce the higher rate of return.

Answer 1

Alternative 1. Present value of Inflow less Present value of outflow Net present Value $ $ $ 125,000 100,000 25,000 Alternative 2. Present value of Inflow less Present value of outflow Net present Value $ $ $ 300,000 262,500 37,500 $ 125,000 1.25 Present value of Inflow Present value of index for Present value of outflow Alternative 1 $ 100,000 $ 300,000 1.14 Present value of Inflow Present value of index for Present value of outflow Alternative 2 $ 262,500 c) As per NPV Alternative 2 is better Accourding to Present value index Alternative 1 produce higher rate of return Please comment if you have any doubt Please give feedback