Question

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?

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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$
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Expected net cash flows in:
Year 1
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Year 2
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Year 3
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