Question

rt P 8-36 (similar to) Question Help 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 $1.01 million $1.48 million ZA Contract Use of Facility 8,4 A 100% 50% SE C 50% a. What are the profitability indexes of the projects? b. What should Fabulous Fabricators do? a. What are the profitability indexes of the projects? The profitability index for contract A is (Round to two decimal places.)

Answer 1

a). PI = NPV / Use of Facility

A's PI = 2.03 / 1 = 2.03

B's PI = 1.01 / 0.5 = 2.02

C's PI = 1.48 / 0.5 = 2.96

b). They should invest in B and C as the together there NPV of $2.49 million is much greater than the NPV of A alone of $2.03 million.