Question

Following is information on two alternative investments being considered by Jolee Company. The company requires a 12% return from its investments.PV of $1. EV of $1. PVA of $1. and FVA of $1 (Use appropriate factor(s) from the tables provided.) Initial investment Expected net cash flows in: Project A $(189,325) Project B $(154,960) 41,000 57.000 81,295 84,400 57.00 36.009 45.ge 63.000 66,000 29, eee 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? Complete this question by entering your answers in the tabs below. Required A Required B For each alternative project compute the net present value. Project A Initial Investment $ 189,325 Chart Values are based on Year Cash Inflow X PV Factor - Present Value

Answer 1

a)

Project A
Initial investment	$189325
Chart values are based on :
i =	12	%
Year	cash inflows	x	PV factor	=	present value
1	$41000		0.8929		$36609
2	$57000		0.7972		$45440
3	$81295		0.7118		$57866
4	$84400		0.6355		$53636
5	$57000		0.5674		$32342
Total present value of cash inflows					$225893
Net present value (total present value of cash inflows - initial investment)					$36568

Project B
Initial investment	$154960
Chart values are based on :
i =	12	%
Year	cash inflows	x	PV factor	=	present value
1	$36000		0.8929		$32144
2	$46000		0.7972		$36671
3	$63000		0.7118		$44843
4	$66000		0.6355		$41943
5	$29000		0.5674		$16455
Total value of cash inflows					$172056
Net present value (total of cash inflows - initial investment)					$17096

Calculations of PV factor :

PV factor = 1/(1+r)ⁿ

where, r = rate of interest and n = number ofyears

so,  

PV factor at 12% :

for year 1: 1/(1+0.12)¹ = 1/(1.12) = 0.8929

for year 2: 1/(1+0.12)² = 1/(1.2544) = 0.7972

for year 3: 1/(1+0.12)³  = 1/(1.4049) = 0.7118

for year 4: 1/(1+0.12)⁴ = 1/(1.5735) = 0.6355

for year 5: 1/(1+0.12)⁵ = 1/(1.7623) = 0.5674

b)

Profitability index
	Choose numerator	/	Choose denominator	=	Profitability index
	Total value of cash inflows	/	initial investment	=	Profitability index
Project A	$225893	/	$189325	=	1.193
Project B	$172056	/	$154960	=	1.110
If only project to be selected, which should it choose					Project A

It has to choose the project A because it has more profitability index. Profitability index indicates the amount of money generated for each dollar invested, so project with highest profitability index is chosen.