Question

Following is information on two alternative investments being considered by Jollee Company. The company requires a 6% 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.) Proiect $ (175325) Proied B $(153.960) Initial investment Expected nel cash flows in year 45.000 47.000 29. 295 95 400 71.000 43.000 60.000 49.000 72.000 33.000 a. For each alternative project compute the net present value b. For each alterative project compute the profitability index of the company can only select one project, which should it choose?

Answer 1

Answer to Question 1:

Answer a.

Project A Initial Investment 1753 25 Chart Values are Based on: 6% Year Cash Inflow PV Factor 45000 0.94340 47000 0.89000 89295 0.83962 95400 x 0.79209 5 71000 0.74726 Present Value of Cash Inflows Present Value 42453 41830 74974 75565 53055 28 78 77 287877 -1753 25 112552 Present Value of Cash Inflows Present Value of Cash Outflows Net Present Value Project B Initial Investment 153960 Chart Values are Based on: i = 6% Year Cash Inflow X PV Factor 1 43000 0.94340 2 60000 x 0.89000 3 49000 0.83962 4 72000 0.79209 33000 x 0.74726 Present Value of Cash Inflows = Present Value 40566 53400 41141 57030 24660 216797 5 Present Value of Cash Inflows Present Value of Cash Outflows Net Present Value 216797 -153960 62837

Answer b.

Project A:

Profitability Index = Present Value of Net Cash Flows / Initial Investment
Profitability Index = $287,877 / $175,325
Profitability Index = 1.64

Project B:

Profitability Index = Present Value of Net Cash Flows / Initial Investment
Profitability Index = $216,797 / $153,960
Profitability Index = 1.41

The company should accept Project A.