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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
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 | Project B | |||||||||
| Initial investment | $ | (189,325 | ) | $ | (156,960 | ) | ||||
| Expected net cash flows in year: | ||||||||||
| 1 | 54,000 | 35,000 | ||||||||
| 2 | 47,000 | 46,000 | ||||||||
| 3 | 86,295 | 64,000 | ||||||||
| 4 | 95,400 | 76,000 | ||||||||
| 5 | 66,000 | 24,000 | ||||||||
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?
Expert Solution
Answer:
Project A is best project
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