Question

Fabulous Fabricators needs to decide how to allocate space in its production facility this year. It is considering the following contracts: NPV $2.03 million $1.04 mllion $1.54 milion Use of Facility 100% 60% 40% Contract a. What are the profitability indexes of the projects? b. What should Fabulous Fabricators do?

Answer 1

a.profitability index of a contract = NPV / use of facility.

The profitability index of contract B ($2.03 m / 100%)	$2.03
the profitability index of contract B ($1.04 m / 60%)	$1.73
the profitability index of contract C ($1.54 m / 40%)	$3.85

b.It should do contracts B and C.

(since it has the capacity to accept both the projects = 60%+40% =>100%)

(this will result in a NPV of $1.04m + 1.54m =>$2.58m).