Question

Exercise 24-12 Net present value, profitability index LO P3 Following is information on two alternative investments being considered by Tiger Co. The company requires an 8% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Project x1 Project x2 Initial investment $(108,000) $(176,000) Expected net cash flows in year: 39,000 81,000 49,500 71,000 74,500 61,000 1 2 3 a. Compute each project's net present value. b. Compute each project's profitability index. If the company can choose only one project, which should it choose?

Answer 1

Net Cash Flows PV @ 8% PV of net cash flows $ 39,000 49,500 74,500 1,63,000 0.9259 $ 36,111 0.8573 42,438 0.7938 59,141 $ 1,37,690 -1,08,000 $ 29,690 $ Project X1 Year 1 Year 2 Year 3 Totals Amount Invested Net Present Value Project X2 Year 1 Year 2 Year 3 Totals Amount Invested Net Present Value $ 81,000 71,000 61,000 2,13,000 0.9259 $ 75,000 0.8573 60,871 0.7938 48,424 $ 1,84,295 -1,76,000 $ 8,295 $ Computation of Profitability Index II Choose Choose Numerator Dinominator PV of Net Initial Cash Flow / Investment Project X1 $ 1,37,690 / 108000 Project X2 $ 1,84,295 / 176000 | If the company can choose only one project, which should it choose Profitability Index Profitability Index $ 1.27 $ 1.05 Project X1