Question

Dehlia Manufacturing has the following two possible projects. The required return is 12 percent.
Year	Project Y		Project Z
0	($31,000)		($60,000)		Req Return	12%
1	$14,000		$24,000
2	$12,400		$23,000
3	$14,800		$22,000
4	$10,400		$21,000

a.What is the profitability index for each project?

b. What is the NPV for each project?

c.Which, if either, of the projects should the company accept?

Answer 1

Cash flows Year Project Y Project Z 0 $ -31,000 $ -60,000 1 $ 14,000 $ 24,000 2 $ 12,400 $ 23,000 3 $ 14,800 $ 22,000 4 $ 10,400 $ 21,000 PVIF@12% 1.000 $ 0.893 $ 0.797 $ 0.712 $ 0.636 $ Present value Project Y Project Z (31,000.00) $ (60,000.00) 12,500.00 $ 21,428.57 9,885.20 $ 18,335.46 10,534.35 $ 15,659.17 6,609.39 $ 13,345.88 Net present value $ 8,528.94 $ 8,769.08 Profitability index 1.31 1.17 =1+5652.25/18000 =1+6421.35/38000 Select Project Z

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