Question

Fabulous Fabricators needs to decide how to allocate space in its production facility this year. It is considering the following contracts: Contract A B C NPV $1.97 million $0.96 million $1.49 million Use of Facility 100% 56% 44% 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. The profitability index is computed as shown below:

= NPV / Use of Facility

The profitability index of Contract A is computed as follows:

= $ 1.97 million / 1

= $ 1.97 million

The profitability index of Contract B is computed as follows:

= $ 0.96 million / 0.56

= $ 1.71 million

The profitability index of Contract C is computed as follows:

= $ 1.49 million / 0.44

= $ 3.39 million

b. Fabulous Fabricators shall accept Contract B and Contract C, since the NPV of both of these Contracts of $ 2.45 million exceeds the NPV of $ 1.97 million earned by Contract A.

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