Question

Fabulous Fabricators needs to decide how to allocate space in its production facility this year. It is considering the following contracts: Use of Facility 100% 54% 46% NPV $1.98 million $1.03 million $1.51 million Contract A В С a. What are the profitability indexes of the projects? b. What should Fabulous Fabricators do?

Answer 1

a). Profitability Index = NPV / Use of Facility

A's Profitability Index = 1.98/100% = 1.98

B's Profitability Index = 1.03/54% = 1.91

C's Profitability Index = 1.51/46% = 3.28

b). They should invest in B and C as together they results in an NPV of $2.54 million,which is greater than the $1.98 million NPV earned by A alone.