Question

Following is information on two alternative investments being considered by Tiger Co. The company requires a 5% 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 x1 Project X2 Initial investment $(102,000) $(164,000) Expected net cash flows in year: 36,000 76,500 46,500 66,500 71,500 56,500 a. Compute each project's net present value. b. Compute each project's profitability index. If the company can choose only one project, which should it choose?

Answer 1

Answer Present Value of Net Cash Flow a Calculation of Projects Net Present Value Net Cash Present Value Flow 1 of 1 at 5% Project X1 Year 1 $36,000 0.95238 Year 2 $46,500 0.90703 Year 3 $71,500 0.86384 Total $154,000 Amount Invested Net Present Value $34,286 $42,177 $61,765 $138,227 ($102,000) $36,227 Project X2 Year 1 Year 2 Year 3 Total Amount Invested $76,500 $66,500 $56,500 $199,500 0.95238 0.90703 0.86384 $72,857 $60,317 $48,807 $181,982 ($164,000) $17,982 Net Present Value

Profitability Index Numerator Denominator Profitability Index Present Value of Cash Flow Amount Invested Profitability Index Project X1 $138,227 $102,000 1.36 Project X2 $181,982 $164,000 : 1.11 Project X1 should be selected