Question

You are asked to evaluate the following two projects for the Norton corporation. Use a discount rate of 12 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Project X (Videotapes of the Weather Report) ($26,000 Investment) Year Cash Flow 1 $13,000 2 11,000 3 12,000 4 11,600 Project Y (Slow-Motion Replays of Commercials) ($46,000 Investment) Year Cash Flow $23,000 16,000 17,000 19,000 2 a. Calculate the profitability index for project X. (Do not round Intermedlate calculations and round your answer to 2 decimal places.) Profitability index b. Calculate the profitability index for project Y. (Do not round Intermedlate calculations and round your answer to 2 decimal places.) Profitability index

Answer 1

		Present Value(PV) of Cash Flow =(Cash Flow)/((1+i)^N)
		i=discount rate =12%=0.12
		N=Year of Cash Flow
		ANALYSIS OF PROJECT X
			N	CF	PV=CF/(1.12^N)
			Year	Cash Flow	Present Value
			0	($26,000)	($26,000)
			1	$13,000	$11,607
			2	$11,000	$8,769
			3	$12,000	$8,541
			4	$11,600	$7,372
				SUM	$10,290
		Net Present Value(NPV)=Sum of PV	$10,290
		Profitability Index=(NPV+Investment)/(Investment)
		Profitability Index=(10290+26000)/26000	1.3958
	a	Profitability Index	1.40
		ANALYSIS OF PROJECT Y
			N	CF	PV=CF/(1.12^N)
			Year	Cash Flow	Present Value
			0	($46,000)	($46,000)
			1	$23,000	$20,536
			2	$16,000	$12,755
			3	$17,000	$12,100
			4	$19,000	$12,075
				SUM	$11,466
		Net Present Value(NPV)=Sum of PV	$11,466
		Profitability Index=(NPV+Investment)/(Investment)
		Profitability Index=(11466+46000)/46000	1.2493
	b	Profitability Index	1.25