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Norwood, Inc
Norwood, Inc., which has a hurdle rate of 14%, is considering three different independent investment opportunities. Each project has a seven-year life. The annual cash flows and initial investment for each of the projects are as follows: (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables.) Annual cash flows Initial investment Project A $131,610 321,400 Project B $120,660 301,400 Project C $109,700 231,400 a. What is the present value of the annual cash flows for each of the three projects? (Round your answers to the nearest dollar amount.) Project A Project B Project C b. What is the net present value of each of the projects? (Round your intermediate calculations and final answers to the nearest dollar amount.) Net Present Value Project A Project B
c. What is the profitability index of each of the projects? (Round the intermediate calculation to the nearest dollar amount. Round your answers to 2 decimal places.) Profitability Index Project A Project B Project C d. In what order should Norwood prioritize investment in the projects? OBAC O A,B,C OC, A, B
Expert Solution
| Requirement:a | |
| Project A | $ 564,384 |
| Project B | $ 517,170 |
| Project C | $ 470,427 |
| Requirement:b | |
| Project A | $ 242,984 |
| Project B | $ 215,770 |
| Project C | $ 239,027 |
| Requirement:c | |
| Profitability Index | |
| Project A | 1.76 |
| Project B | 1.72 |
| Project C | 2.03 |
| Requirement:d | |
| C,A,B |
Notes:
1) Prioritize should be given based on Profitability index of the projects.
Working:
| Initial Investment | $ 321,400 | ||||
| Chart Values are Based on: | |||||
| Cost of Capital | 14.00% | % | |||
| Year | Cash Inflow[a] | * | Present Value of 1 (b) | = | Present Value of Net Cash Flows (a*b) |
| 0 | $ 321,400 | 1.00000 | $ 321,400 | ||
| 1 | $ 131,610 | * | 0.87719 | = | $ 115,447 |
| 2 | $ 131,610 | * | 0.76947 | = | $ 101,270 |
| 3 | $ 131,610 | * | 0.67497 | = | $ 88,833 |
| 4 | $ 131,610 | * | 0.59208 | = | $ 77,924 |
| 5 | $ 131,610 | * | 0.51937 | = | $ 68,354 |
| 6 | $ 131,610 | * | 0.45559 | = | $ 59,960 |
| 7 | $ 131,610 | * | 0.39964 | $ 52,596 | |
| Present Value of Annual Cash Inflow[A] | $ 564,384 | ||||
| Net Present Value of Cash Outflow [B] | $ (321,400) | ||||
| Net Present Value of Option A [A-B] | $ 242,984 | ||||
| Profitability Index [A/B] | 1.76 | ||||
| Initial Investment | $ 301,400 | ||||
| Chart Values are Based on: | |||||
| Cost of Capital | 14.00% | % | |||
| Year | Cash Inflow[a] | * | Present Value of 1 (b) | = | Present Value of Net Cash Flows (a*b) |
| 0 | $ (301,400) | 1.00000 | $ (301,400) | ||
| 1 | $ 120,600 | * | 0.87719 | = | $ 105,789 |
| 2 | $ 120,600 | * | 0.76947 | = | $ 92,798 |
| 3 | $ 120,600 | * | 0.67497 | = | $ 81,402 |
| 4 | $ 120,600 | * | 0.59208 | = | $ 71,405 |
| 5 | $ 120,600 | * | 0.51937 | = | $ 62,636 |
| 6 | $ 120,600 | * | 0.45559 | = | $ 54,944 |
| 7 | $ 120,600 | * | 0.39964 | $ 48,196 | |
| Present Value of Annual Cash Inflow[A] | $ 517,170 | ||||
| Net Present Value of Cash Outflow [B] | $ (301,400) | ||||
| Net Present Value of Option A [A-B] | $ 215,770 | ||||
| Profitability Index [A/B] | 1.72 | ||||
| Initial Investment | $ 231,400 | ||||
| Chart Values are Based on: | |||||
| Cost of Capital | 14.00% | % | |||
| Year | Cash Inflow[a] | * | Present Value of 1 (b) | = | Present Value of Net Cash Flows (a*b) |
| 0 | $ (231,400) | 1.00000 | $ (231,400) | ||
| 1 | $ 109,700 | * | 0.87719 | = | $ 96,228 |
| 2 | $ 109,700 | * | 0.76947 | = | $ 84,411 |
| 3 | $ 109,700 | * | 0.67497 | = | $ 74,044 |
| 4 | $ 109,700 | * | 0.59208 | = | $ 64,951 |
| 5 | $ 109,700 | * | 0.51937 | = | $ 56,975 |
| 6 | $ 109,700 | * | 0.45559 | = | $ 49,978 |
| 7 | $ 109,700 | * | 0.39964 | $ 43,840 | |
| Present Value of Annual Cash Inflow[A] | $ 470,427 | ||||
| Net Present Value of Cash Outflow [B] | $ (231,400) | ||||
| Net Present Value of Option A [A-B] | $ 239,027 | ||||
| Profitability Index [A/B] | 2.03 | ||||
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