Question

Following is information on two alternative investments being considered by Tiger Co. 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 X1					Project X2
Initial investment		$	(80,000	)			$	(120,000	)
Expected net cash flows in year:
1			25,000					60,000
2			35,500					50,000
3			60,500					40,000

  
a. Compute each project’s net present value.
b. Compute each project’s profitability index. If the company can choose only one project, which should it choose?

Complete this question by entering your answers in the tabs below Required A Required B Compute each project's net present value. Present Value Present Net Cash Value of 1 of Net Cash Flows at 12% Flows Project X1 S 25,000 24.038x Year 1 0.9615 0.9246 Year 2 35,500 32,823 Year 3 60,500 0.8890 53,785 S 121,000 Totals 110,646 Amount (80,000) invested Net present value 30,640 Project X2 S 60,000 Year 1 0.9615 57,800 0.9246 46,230x Year 2 50,000 35,580x Year 3 40,000 0.8890 S 150,000 Totals 139.480 Amount (120,000) invested Net present value 19.480 Required A Required B

Answer 1

Answer- a)-The net present value of Project X1 = $13687.

Explanation-

Calculation of Project X1 Net Present Value
	Net Cash Flows $ (a)	Present Value of 1 at 12% (b)	Present Value of cash flows (c=a*b) $
Year 1	25000	0.8929	22323
Year 2	35500	0.7972	28301
Year 3	60500	0.7118	43064
Totals
Total present value of cash inflow (a)			93687
Total cash outflow (b)	80000	1	80000
Net Present Value $ (c=a-b)			13687

The net present value of Project X2 = $1906.

Explanation-

Calculation of Project X2 Net Present Value
	Net Cash Flows $ (a)	Present Value of 1 at 12% (b)	Present Value of cash flows (c=a*b) $
Year 1	60000	0.8929	53574
Year 2	50000	0.7972	39860
Year 3	40000	0.7118	28472
Totals
Total present value of cash inflow (a)			121906
Total cash outflow (b)	120000	1	120000
Net Present Value $ (c=a-b)			1906

b)-

Calculation of Project Profitability Index
Particulars	Projects
	X1	X2
Net Present Value $ (A)	13687	1906
Investment required $ (B)	80000	120000
Profitability Index C=A/B	0.17	0.02

If the company can choose only one project, Project X1 should be choose.