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Homework answers / question archive / Following is fortion on two steberg considered by Joiee Company The company roles 10 tam omnem PVCISI VA Cond EVA E51) Use appropriate factors from the tables provided) a
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Exercise 11-10 NPV and profitability index LO P3 Following is Information on two alternative Investments being considered by Jolee Company. The company requires a 10% 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 A $(184,325) Project 3 $(155, 968) Initial investment Expected net cash flows in: Year 1 Year 2 Year 3 Year 4 Years 38,888 41, see 75,295 91, 4ee 73, 37,80 61,888 64.ee 56. Bee 29, eee a. For each alternative project compute the net present value b. For each alternative project compute the profitability Index. If the company can only select one project, which should it choose? Complete this question by entering your answers in the tabs below. Required A Required B For each alternative project compute the profitability index. If the company can only select one project, which sh choose? Profitability Index Choose Numerator: 1 Choose Denominator: Present value of net cash flows Initial investment Project A 5 184,325 Project B 5 165,900 1 the company can only select one project, which should it choose? Profitability Index Profitability index 0.00 0.00
A) Calculation for net present value of Project A:
| Year | Cash Inflows | X | PV Factor | = | Present Value |
| 1 | 38,000 | X | 0.9091 | = | 34,546 |
| 2 | 41,000 | X | 0.8264 | = | 33,882 |
| 3 | 75,295 | X | 0.7513 | = | 56,569 |
| 4 | 91,400 | X | 0.6830 | = | 62,426 |
| 5 | 73,000 | X | 0.6209 | = | 45,326 |
| Present value | = | 232,749 |
| Present value of net cash flows | 232,749 |
| Less: Initial Investment | 184,325 |
| Net Present Value | 48,424 |
Calculation for Net Present Value of Project B
| Year | Cash Inflows | X | PV Factor | = | Present Value |
| 1 | 37,000 | X | 0.9091 | = | 33,637 |
| 2 | 61,000 | X | 0.8264 | = | 50,410 |
| 3 | 64,000 | X | 0.7513 | = | 48,083 |
| 4 | 66,000 | X | 0.6830 | = | 45,078 |
| 5 | 29,000 | X | 0.6209 | = | 18,006 |
| Present Value | = | 195,214 |
| Present value of net cash flows | 195,214 |
| Less: Initial Investment | 155,960 |
| Net Present value | 39,254 |
B) Calculation for Profitability Index
| Numerator | / | Denominator | = | Profitability Index | |
| Present value of net cash flows | / | Initial Investment | = | Profitability Index | |
| Project A | 232,749 | / | 184,325 | = | 1.2627 |
| Project B | 195,214 | / | 155,960 | = | 1.2517 |
If the company only can select one project, then Project A should be chosen . Because it has comparatively higher Net present value and profitability index over Project B.
