Question

Following is information on two alternative investments being considered by Tiger Co. The company requires a...

Following is information on two alternative investments being considered by Tiger Co. The company requires a 9% 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 X1 Project X2
Initial investment $ (80,000 ) $ (123,000 )
Expected net cash flows in:
Year 1 28,000 64,500
Year 2 38,500 54,500
Year 3 63,500 44,500

a. Compute each project’s net present value.
b. Compute each project’s profitability index. If the company can choose only one project, which should it choose?

Homework Answers

Answer #1

Ans:

A.

Net Cash Flows Pv of 1 at 9% PV of Net Cash Flows
Project X1
Year 1 28,000 0.91743 25688.04
Year 2 38,500 0.841679 32404.64
Year 3 63,500 0.772183 49033.62
Totals 107126.30
Amount invested 80,000
Net present value 27,126
Project X2
Year 1 64,500 0.91743 59174.23
Year 2 54,500 0.841679 45871.50
Year 3 44,500 0.772183 34362.14
Totals 139407.88
Amount invested 123,000
Net present value 16,408
Numerator Denominator
PV cash Flow / Amount Invested =
project X1 107126.3 / 80,000 = 1.34
project X2 139407.88 / 123,000 = 1.13
The company should choose project X1

Hope this helped ! Let me know in case of any queries.

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