Question

Following is information on two alternative investments being considered by Jolee Company. The company requires a 10% 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 A					Project B
Initial investment		$	(180,325	)			$	(146,960	)
Expected net cash flows in year:
1			35,000					35,000
2			49,000					58,000
3			89,295					54,000
4			82,400					76,000
5			61,000					36,000

a. For each alternative project compute the net present value.
b. For each alternative project compute the profitability index. If the company can only select one project, which should it choose?

Project A 180,325 Initial Investment Chart Values are Based on: Year Cash Inflow x PV FactorPresent Value 2 4 Project B 146,960 Initial Investment Year Cash Inflow x PV Factor Present Value 2 4 5

Answer 1

Ans. A 1	Project A
	Year	Cash inflow   X	P V Factor =	Present value
	1	$35,000	0.909	$31,818.18
	2	$49,000	0.826	$40,495.87
	3	$89,295	0.751	$67,088.66
	4	$82,400	0.683	$56,280.31
	5	$61,000	0.621	$37,876.20
	Present value of cash inflows			$233,559.21
	Present value of cash inflows	$233,559	(rounded)
	Less: Investment	-$180,325
	Net present value	$53,234
Ans. A 1	Project B
	Year	Cash inflow   X	P V Factor =	Present value
	1	$35,000	0.909	$31,818.18
	2	$58,000	0.826	$47,933.88
	3	$54,000	0.751	$40,571.00
	4	$76,000	0.683	$51,909.02
	5	$36,000	0.621	$22,353.17
	Present value of cash inflows			$194,585.26
	Present value of cash inflows	$194,585	(rounded)
	Less: Investment	-$146,960
	Net present value	$47,625
	*Calculations of Present value factors:
	Year	PV @ 10%
	1	1 / (1 + 0.1)^1	0.909
	2	1 / (1 + 0.1)^2	0.826
	3	1 / (1 + 0.1)^3	0.751
	4	1 / (1 + 0.1)^4	0.683
	5	1 / (1 + 0.1)^5	0.621
Ans. B	Profitability index   =    Present value of cash inflows / Investment
	Project A	$233,559 / $180,325	1.30
	Project B	$194,585 / $146,960	1.32
	If we use Profitability index as a profitability measure, Project B should be selected because it has a higher profitability index.