Question

Cori's Sausage Corporation is trying to choose between the following two mutually exclusive design projects:

Year	Cash Flow (I)				Cash Flow (II)
0	–	$	67,000		–	$	17,700
1			28,000				9,550
2			28,000				9,550
3			28,000				9,550

a-1. If the required return is 11 percent, what is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)

  

	Profitability Index
Project I
Project II

  

a-2. If the company applies the profitability index decision rule, which project should the firm accept?
  

	Project I
	Project II

  
b-1. What is the NPV for each project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

	NPV
Project I	$
Project II	$

b-2. If the company applies the NPV decision rule, which project should it take?
  

	Project II
	Project I

Answer 1

Calculate the profitability index and NPV of the investment as follows: | PVF @ 11% Year Cash flow 1 Cash flow 2 1.000000 -67,000.00700.00-17,700.00$17,700.00 10.900901 $28,000.00 $25,225.23$9,550.00$8,603.60 20.811622 $28,000.00 $22,725.43 $9,550.00$7,750.99 30.731191 $28,000.00 $20,473.36 $9,550.00 $6,982.88 4 PV of cashin flows Profitability index Net present value $68,424.01 1.02 $1,424.01 $23,337.48 7 a1 8 b1 1.32 $5,637.43 b2Project a2Project2 Formulas: A B G H | Cash flow 1 | Cash flow 2 Year PVF @ 11% 0 =1/(1+11%)AB2 -67000 -C2*02-17700-C2*F2 11 | 2 -1/(1+11%)ng4 28000 -c4" D4 9550 -C4"F4 13-1/(1+11%)ng5 280001-c5 * D5 |9550 |-c5 * F51 2 -1/(1+11%)ng3|280001-c3"D3|9550 |-C3*F31 4 PVof cashin flows |=SUM(E3:E5) |:SUM(G3:G5) 7 a1 Profitability index (D6/(-E2))F6/(-G2) 8 b1 Net present valueD6+E2 a2 Project 2 F6+G2b2 Project 2