I am stuck in this problem, can someone help
First we analyze both projects by calculating individual PI
Let us consider the project A
Initial Cost=I=1500000
Net benefits per year=NB=260000-120000=$140000
Salvage value=S=$90000
PV of future cash flows=NB*(P/A,7%,30)+S*(P/F,7%,30)
Let us calculate interest factors
(P/F,0.06.15)=1/(1+0.07)^30=0.131367
PV of future cash flows=140000*12.409041+90000*0.131367=$1749088.77
PI=PV of future cash flows/Initial Cost=1749088.77/1500000=1.1660
Let us consider the project B
Initial Cost=I=1400000
Net benefits per year=NB=240000-110000=$130000
Salvage value=S=$80000
PV of future cash flows=NB*(P/A,7%,30)+S*(P/F,7%,30)
PV of future cash flows=130000*12.409041+80000*0.131367=$1623684.69
PI=PV of future cash flows/Initial Cost=1623684.69/1400000=1.1598
We find value of PI is more than 1 for both cases, both are acceptable.
Now we carry out incremental PI analysis.
Project B has lower cost. So, it is base case.
Incremental Initial Cost=Ii=1500000-1400000=$100,000
Incremental Net benefits per year=NBi=140000-130000=10000
Incremental Salvage value=Si=$90000-80000=$10000
PV of incremental future cash flows=NBi*(P/A,6%,15)+Si*(P/F,6%,15)
PV of future cash flows=10000*12.409041+10000*0.131367=$125404.08
Incremental PI=PV of incremental future cash flows/Incremental Initial Cost
= 125404.08/100000=1.2540
We can see incremental PI is higher than 1, it is advisable to incur extra expenditure on project A. We should select project A
Correct Option is
1.254 A
I am stuck in this problem, can someone help What is the profntability index ratio for the incremental analysis between...
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