1 Appendix B Present value of $1. PVF PV=FV Percent Period 1% 5% 8% 9% 12%...

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1 Appendix B Present value of $1. PVF PV=FV Percent Period 1% 5% 8% 9% 12% 1 2. 3 0.893 0.797 012 4 6 7 8 9 10 ..............

Appendix B (concluded) Present value of $1 Period 15% 18% 35% 50% 1 2 3 4 5 6 7 8 9 10 11 13% 0.885 0.783 0.693 0.613 0.543 0

You are asked to evaluate the following two projects for the Norton corporation. Use a discount rate of 12 percent. Use Appen

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Answer 1

Answer #1

Project X

Discount rate (I)= 12%

Present value of cash inflows = CF1/(1+I)^1 +CF2/(1+I)^2 +CF3/(1+I)^3 + CF4/(1+I)^4

=(13000/(1+12%)^1)+(11000/(1+12%)^2)+(12000/(1+12%)^3)+(11600/(1+12%)^4)

=36289.64819

(Other formula = (CF1*PV of $1@12% for 1 period) +(CF2*PV of $1@12% for 2 period)+(CF3*PV of $1@12% for 3 period)+(CF4*PV of $1@12% for 4 period)

=(13000*0.893)+(11000*0.797)+(12000*0.712)+(11600*0.636)

=36297.6

(Difference is due to Round off intermediate calcultion)

Profitability index formula = PV of cash inflows/initial investment

=36289.65/26000

=1.395755769

PI of project X is 1.40

B.

Project Y

Discount rate (I)= 12%

Present value of cash inflows = CF1/(1+I)^1 +CF2/(1+I)^2 +CF3/(1+I)^3 + CF4/(1+I)^4

=(23000/(1+12%)^1)+(16000/(1+12%)^2)+(17000/(1+12%)^3)+(19000/(1+12%)^4)

=57465.92403

Profitability index formula = PV of cash inflows/initial investment

=57465.92403/46000

=1.249259218

PI of project Y is 1.25

Conclusion : Profitability index of project X is highest 1.40. so first priority will be given to project X

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