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

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