Question

Exercise 24-11 Net present value, profitability index LO P3 Following is information on two alternative investments being considered by Tiger Co. 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.) Project X1 $ (84,000) Project X2 $ (128,000) Initial investment Expected net cash flows in year: 27,000 37,500 62,500 63,000 53,000 43,000 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 profitability index. If the company can choose only one project, which should it choose? Profitability Index 7 Choose Denominator: Choose Numerator: = = Profitability Index Profitability index Project X 1 Project X2 If the company can choose only one project, which should it choose? < Required A Required B >

Answer 1

a.

Project X1
Years	Cash Inflow	x	PV Factor	=	Present Value
1	27,000	x	0.9434	=	25,471.80
2	37,500	x	0.89000	=	33,375.00
3	62,500	x	0.83962	=	52,476.25
Total				=	111,323
Initial Investment				=	-84,000
Net Present Value				=	$27,323

Project X2
Years	Cash Inflow	x	PV Factor	=	Present Value
1	63,000	x	0.9434	=	59,434.20
2	53,000	x	0.89000	=	47,170.00
3	43,000	x	0.83962	=	36,103.66
Total				=	142,708
Initial Investment				=	-128,000
Net Present Value				=	$14,708

b.

Profitability Index
	Choose Numerator	/	Choose Denominator	=	Profitability Index
	Present value of cash inflows	/	Initial Investment	=	Profitability Index
Project X1	111,323	/	84,000	=	1.33
Project X2	142,708	/	128,000	=	1.11
If the company can choose only one project, which should it choose?				Project X1 should be Chosen

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