Question

Following is information on two alternative investments being considered by Tiger Co. The company requires a 7% 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 $ (86,000) Project x2 $ (132,000) Initial investment Expected net cash flows in: Year 1 Year 2 Year 3 28,000 38,500 63,500 64,500 54,500 44,500 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

Answer 1

A.

	Net cash flows	Present value of 1 at 7%	Present value of net cash flows
Project X1
Year 1	28,000	0.93458	$ 26,168
Year 2	38,500	0.87344	$ 33,627
Year 3	63,500	0.81630	$ 51,835
Totals	130,000		$ 111,631
Amount invested	-86,000		-$ 86,000
Net present value			$ 25,631
Project X2
Year 1	64,500	0.93458	$ 60,280
Year 2	54,500	0.87344	$ 47,602
Year 3	44,500	0.81630	$ 36,325
Totals	163,500		$ 144,208
Amount invested	-132,000		-$ 132,000
Net present value			$ 12,208

Note: Use PV of $1 table for Present value of 1 at 7% values.

B.

Profitability index
	Choose Numerator	/	Choose Denominator	=	Profitability index
	Present value of net cash inflows	/	Amount inveted	=
Project X1	111,630.53	/	86,000	=	1.30
Project X2	144,208.04	/	132,000	=	1.09
Project to be selected					Project X1