Question

Robben Manufacturing has the following two possible projects. The required return is 11 percent. Year Project Y Project Z 0 27,200 52.000 21,000 23,000 19,000 21,000 13,200 11,600 14.000 9.600 a. What is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.) Profitability index Project Y Project Z b. What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) NPV Project Y Project Z c. Which, if either, of the projects should the company accept? (Click to select) Neither Project Z Project Y eBook & Resources

Answer 1

Hello Sir/ Mam

PRESENT VALUE SCHEDULE

Y				Z
Year	Cashflows	Present Value Factor	Present Value	Year	Cashflows	Present Value
0	-$27,200.00	1.000000	-$27,200.00	0	-$52,000.00	-$52,000.00
1	$13,200.00	0.900901	$11,891.89	1	$21,000.00	$18,918.92
2	$11,600.00	0.811622	$9,414.82	2	$23,000.00	$18,667.32
3	$14,000.00	0.731191	$10,236.68	3	$19,000.00	$13,892.64
4	$9,600.00	0.658731	$6,323.82	4	$21,000.00	$13,833.35
Total			$10,667.21			$13,312.22

(a) Profitability Index :

	PI
Project Y	1.392
Project Z	1.256

$Profitability \ Index=\frac{Present \ Value \ of \ Cash \ Inflows}{Present \ Value \ of \ Cash \ Outflows}$

$Profitability \ Index(A)=\frac{\$37,867.21 }{\$27,200.00 }=1.392$

$Profitability \ Index(B)=\frac{\$65,312.22 }{\$52,000.00 }=1.256$

(b) NPV : As evident from the Present Value Schedule above,

	NPV
Project Y	$10,667.21
Project Z	$13,312.22

$NPV = \sum {Present \ Value \ of \ Cashflows}$

(c) THE CORERCT ANSWER IS OPTION B : PROJECT Z

Sir/ Mam, in case of multiple questions asked in a single post, we are required just to answer the first. Hence, I'll request you to please ask the second one in a seperate post. Thanks!

I hope this solves your doubt.

Feel free to comment if you still have any query or need something else. I'll help asap.

Do give a thumbs up if you find this helpful.