You are asked to evaluate the following two projects for Boring Corporation. Use a discount rate of 12 percent. Use Appendix B.
Project X (DVDs | Project Y (Slow-Motion | |||||||||
Year | Cash Flow | Year | Cash Flow | |||||||
1 | $24,000 | 1 | $34,000 | |||||||
2 | 22,000 | 2 | 27,000 | |||||||
3 | 23,000 | 3 | 28,000 | |||||||
4 | 22,600 | 4 | 30,000 | |||||||
a. Calculate the profitability index for project X. (Round "PV Factor" to 3 decimal places. Round the final answer to 2 decimal places.)
PI
b. Calculate the profitability index for project Y. (Round "PV Factor" to 3 decimal places. Round the final answer to 2 decimal places.)
PI
c. Using the NPV method combined with the PI approach, which project would you select? Use a discount rate of 12 percent.
Project Y
Project X
Step 1 ; Calculate present value of Cash Outflows
Step 2 : Calculate Present Value of Cash Inflows
Step 3 : Calculate Profitability Index
Profitability Index = Present value of cash inflows / Present value
of cash outflows
a) Calculation of Profitability index of Project X
Year | Particulars | Amount | PVF @ 12% | Present Value |
Cash Outflows | ||||
0 | Investment cost | $48,000.00 | 1 | $48,000.00 |
Present Value of Cash outflows (A) | $48,000.00 | |||
Cash Inflows | ||||
1 | Cash Inflows Yr 1 | $24,000.00 | 0.892857143 | $21,428.57 |
2 | Cash Inflows Yr 2 | $22,000.00 | 0.797193878 | $17,538.27 |
3 | Cash Inflows Yr 3 | $23,000.00 | 0.711780248 | $16,370.95 |
4 | Cash Inflows Yr 4 | $22,600.00 | 0.635518078 | $14,362.71 |
Present Value of Cash inflows (B) | $69,700.49 | |||
Profitability Index (B/A) | 1.45 |
a) Calculation of Profitability index of Project
Y
Year | Particulars | Amount | PVF @ 12% | Present Value |
Cash Outflows | ||||
0 | Investment cost | $68,000.00 | 1 | $68,000.00 |
Present Value of Cash outflows (A) | $68,000.00 | |||
Cash Inflows | ||||
1 | Cash Inflows Yr 1 | $34,000.00 | 0.892857143 | $30,357.14 |
2 | Cash Inflows Yr 2 | $27,000.00 | 0.797193878 | $21,524.23 |
3 | Cash Inflows Yr 3 | $28,000.00 | 0.711780248 | $19,929.85 |
4 | Cash Inflows Yr 4 | $30,000.00 | 0.635518078 | $19,065.54 |
Present Value of Cash inflows (B) | $90,876.77 | |||
Profitability Index (B/A) | 1.34 |
Note :
PVF(r,t) = (1/(1+r))^n
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