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

(A).Calculation of Net Present Value of each Project:-

Particulars	Net Cash Flows	Present Value of1 at 8%	Present Value of Net Cash Flows
PROJECT X1
Year 1	39,000	0.926	36,114
Year 2	49,500	0.857	42,422
Year 3	74,500	0.794	59,153
Totals	1,63,000		1,37,689
Amount Invested			(1,08,000)
Net Present Value			29,689

Particulars	Net Cash Flows	Present Value of1 at 8%	Present Value of Net Cash Flows
PROJECT X2
Year 1	81,000	0.926	75,006
Year 2	71,000	0.857	60,847
Year 3	61,000	0.794	48,434
Totals	2,13,000		1,84,287
Amount Invested			(1,76,000)
Net Present Value			8287

(B).Calculation of Profitability Index of both Project:-

Profitability Index=Present Value of Future Cash Flows/Initial Investment

Particualrs	Numerater	Denominater	Profitabilty Index
PROJECT X1	1,37,689	1,08,000	1.27
PROJECT X2	1,84,287	176,000	1.05

Desicion:-

Based on NPV PROJECT X1 is Bettter because it has Higher NPV.

Based on Profitabilty Index also PROJECT X2 is better becauase it has Higher PI and PI is more than 1 in both project which indicated both project have postive NPV.