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, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

	Project A					Project B
Initial investment		$	(173,325	)			$	(154,960	)
Expected net cash flows in:
Year 1			41,000					31,000
Year 2			57,000					62,000
Year 3			76,295					59,000
Year 4			80,400					70,000
Year 5			71,000					37,000

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

Answer:

Project A
Years	Cash flows	Present value @ 12%	Present value
1	41,000	0.893	36,613
2	57,000	0.797	45,429
3	76,295	0.712	54,322
4	80,400	0.636	51,134
5	71,000	0.567	40,257
Present Value of cash Inflows			2,27,755
Present Value of cash Outflows			-1,73,325
Net Present value			54,430
Project B
Years	Cash flows	Present value @ 12%	Present value
1	31,000	0.893	27,683
2	62,000	0.797	49,414
3	59,000	0.712	42,008
4	70,000	0.636	44,520
5	37,000	0.567	20,979
Present Value of cash Inflows			1,84,604
Present Value of cash Outflows			-1,54,960
Net Present value			29,644

b.Profitability Index
	Choose Numerator	/	Choose Denominator	=	Profitability Index
	Present Value of Cash Inflows	/	Initial Investment	=
Project A	2,27,755	/	1,73,325	=	1.31
Project B	1,84,604	/	1,54,960		1.19
Project A should be accepted as it have more Profitability Index