Question

You are asked to evaluate the following two projects for the Norton corporation. Use a discount rate of 10 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) ($34,000 Investment)						Project Y (Slow-Motion Replays of Commercials) ($54,000 Investment)
Year		Cash Flow				Year		Cash Flow
1		$	17,000			1		$	27,000
2			15,000			2			20,000
3			16,000			3			21,000
4			15,600			4			23,000
a. Calculate the profitability index for project X. (Do not round intermediate calculations and round your answer to 2 decimal places.) Profibility Index ____ b. Calculate the profitability index for project Y. (Do not round intermediate calculations and round your answer to 2 decimal places.) Profibility Index ____ ______________________________________________________________________________________________ Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Project E Project H ($49,000 Investment) ($46,000 Investment) Year Cash Flow Year Cash Flow 1 $ 11,000 1 $ 25,000 2 15,000 2 18,000 3 25,000 3 16,000 4 32,000 A.Determine the net present value of the projects based on a zero percent discount rate. NPV Project E Project H B. Determine the net present value of the projects based on a discount rate of 9 percent. (Do not round intermediate calculations and round your answers to 2 decimal places.) NPV Project E Project H

Answer 1

1)

Cash flows Year Project X Project Y 0 $ -34,000 $ -54,000 1 $ 17,000 $ 27,000 2 $ 15,000 $ 20,000 3 $ 16,000 $ 21,000 4 $ 15,600 $ 23,000 PVIF@10% 1.000 $ 0.909 $ 0.826 $ 0.751 $ 0.683 $ Present value Project X Project Y (34,000.00) $ (54,000.00) 15,454.55 $ 24,545.45 12,396.69 $ 16,528.93 12,021.04 $ 15,777.61 10,655.01 $ 15,709.31 Net present value $ 16,527.29 $ 18,561.30 Profitability index 1.49 =1+16527.29/34000 1.34 =1+18561.3/54000

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