Question

Stuart Company has a choice of two investment alternatives. The present value of cash inflows and outflows for the first alternative is $200,000 and $162,000, respectively. The present value of cash inflows and outflows for the second alternative is $375,000 and $300,000, respectively. Required a. Calculate the net present value of each investment opportunity. (Negative amounts should be indicated by a minus sign.) b. Calculate the present value index for each investment opportunity. (Round "PVI" to 2 decimal places.) c. Indicate which investment will produce the higher rate of return. a. Alternative 1 (NPV) Alternative 2 (NPV) b. Alternative 1 (PVI) Alternative 2 (PVI) C. The investment that will produce the higher rate of return is

Answer 1

a.

NPV ( alternative 1) = Present value of cash inflows - Present value of cash outflows

= 200,000-162,000

= $38,000

NPV ( alternative 2) = Present value of cash inflows - Present value of cash outflows

= 375,000-300,000

= $75,000

b.

PVI ( alternative 1) = Present value of cash inflows / Present value of cash outflows

= 200,000/162,000

= 1.23

PVI ( alternative 2) = Present value of cash inflows / Present value of cash outflows

= 375,000/300,000

= 1.25

c.

The investment that will produce the higher rate of return is Alternative 2.

a.	Alternative 1 (NPV)	$38,000
	Alternative 2 (NPV)	$75,000
b.	Alternative 1 (PVI)	1.23
	Alternative 2 (PVI)	1.25
c.	The investment that will produce the higher rate of return is	Alternative 2

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