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) ($46,000 Investment)						Project Y (Slow-Motion Replays of Commercials) ($80,000 Investment)
Year		Cash Flow				Year		Cash Flow
1		$	30,000			1		$	40,000
2			28,000			2			33,000
3			20,000			3			34,000
4			18,600			4			36,000

  

a.	Calculate the profitability index for project X. (Do not round intermediate calculations and round your answer to 2 decimal places.)

    

Profitability index

  

b.	Calculate the profitability index for project Y. (Do not round intermediate calculations and round your answer to 2 decimal places.)

  

Profitability index

  

c.	Which project would you select?
	Project X Project Y

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Answer 1

Profitability index= 1+NPV/Initial Inv

	PROJECT X
YEAR	CASH FLOWs	DCF@10%	DISC Cash Flows
0	-46000	1	-46000.00
1	30000	0.91	27272.73
2	28000	0.83	23140.50
3	20000	0.75	15026.30
4	18600	0.68	12704.05
		NPV	32143.57

Profitability index=1+32143.57/46000=1.69

	PROJECT Y
YEAR	CASH FLOWs	DCF@10%	DISC Cash Flows
0	-80000	1	-80000.00
1	40000	0.91	36363.64
2	33000	0.83	27272.73
3	34000	0.75	25544.70
4	36000	0.68	24588.48
		NPV	33769.55

profitability index= 1+33769.55/80000=1.42

Accept a project if the profitability index is greater than 1, stay indifferent if the profitability index is zero and don't accept a project if the profitability index is below 1.

since both th projects have above 1 profitability index decision must be taken with the help of npv. project with greter npv should be accepted.

project Y having greater npv than project X

PROJECT Y SHOULD BE SELECTED