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Following is information on two alternative investments being considered by Jolee Company. The company requires a 6% 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 $ (174,325 ) $ (152,960 )
Expected net cash flows in year:
1 41,000 44,000
2 60,000 53,000
3 72,295 68,000
4 87,400 81,000
5 59,000 30,000
For each alternative project compute the net present value.
Project A
Initial Investment $174,325
Chart values are based on:
i =
Year Cash inflow x Table factor = Present Value
1 =
2 =
3 =
4 =
5 =
Project B
Initial Investment $152,960
Year Cash inflow x Table factor = Present Value
1 =
2 =
3 =
4 =
5 =
For each alternative project compute the profitability index.
Choose Numerator: / Choose Denominator: = Profitability index
/ = Profitability index
Project A
Project B
2. Assume If the company can only select one project, which should it choose?
Project A or Project B

Sagot :

Answer:

Project A

NPV = $91,771.53

PI = 1.53

Project B

NPV = $79,390.69

PI = 1.52

Project A should be chosen because it has the higher NPV

Explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

NPV can be calculated using a financial calculator  

Only projects with a positive NPV should be accepted. A project with a negative NPV should not be chosen because it isn't profitable.  

When choosing between positive NPV projects, choose the project with the highest NPV first because it is the most profitable.

Project A

Cash flow in year 0 = $ (174,325)  

Cash flow in year 1 = 41,000

Cash flow in year 2 =  60,000

Cash flow in year 3 = 72,295

Cash flow in year 4 = 87,400

Cash flow in year 5 = 59,000

I =  6%

NPV = $91,771.53

Project B

Cash flow in year 0 = (152,960 )

Cash flow in year 1 = 44,000

Cash flow in year 2 =  53,000

Cash flow in year 3 = 68,000

Cash flow in year 4 = 81,000

Cash flow in year 5 = 30,000

I =  6%

NPV = $ $79,390.69

profitability index = 1 + (NPV / Initial investment)

Project A = 1 +( $91,771.53  /$174,325) = 1.53

Project B = 1 + ( $79,390.69 / 152,960 = 1.52

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute  

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