Question

Following is information on two alternative investments being considered by Jolee Company. The company requires a 10% 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 $(184,325) Project B $(157,960) Initial investment Expected net cash flows in: Year 1 Year 2 Year 3 Year 4 Year 5 41,000 41,000 89, 295 80,400 55,000 42,000 45,000 64,000 75,000 38,000 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

* PROJECT A Initial Investment I = 10% $ 1,84,325 Year Cash Flow PV Factor 2 $ 41,000 $ 41,000 $89,295 $ 80,400 $ 55,000 0.9091 0.8264 0.7513 0.6830 0.6209 Present Value $ 37,273 $33,884 $ 67,089 $ 54,914 $ 34,151 $ 2,27,311 Present Value of Cash Inflows Present Value of Cash Outflows NET PRESENT VALUE $2,27,311 $ 1,84,325 $ 42,986 PROJECT B Initial Investment I = 10% $ 1,57,960 Year Cash Flow PV Factor UWNI $ 42,000 $ 45,000 $ 64,000 $ 75,000 $ 38,000 0.9091 0.8264 0.7513 0.6830 0.6209 Present Value $ 38,182 $ 37,190 $ 48,084 $ 51,226 $ 23,595 $ 1,98,277 Present Value of Cash Inflows Present Value of Cash Outflows NET PRESENT VALUE $ 1,98,277 $ 1,57,960 $ 40,317 PL * PROFITABILITY INDEX Annual Pre tax Income Details PV of Cash Inflows Project A $2,27,311 Project B $ 1,98,277 Accounts Receivable Initial Investment $ 1,84,325 $ 1,57,960 1.23 1. 1.26 * Based on NPV, Project A is better as it has more cash inflows. Based on PI, Project B is better as it has higher Profitability Index. * Since in absolute terms cash inflows are more in Project A, it should be chosen.