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 \$ (96,000 ) \$ (141,000 ) Expected net cash flows in: Year 1 33,000 72,000 Year 2 43,500 62,000 Year 3 68,500 52,000 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?

Compute each project’s net present value.

 Net Cash Flows Present Value of 1 at 9% Present Value of Net Cash Flows Project X1 Year 1 Year 2 Year 3 Totals \$0 \$0 Amount invested Net present value \$0 Project X2 Year 1 Year 2 Year 3 Totals \$0 \$0 Amount invested Net present value \$0

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

 Profitability Index Choose Numerator: / Choose Denominator: = Profitability Index / = Profitability index Project X1 0 Project X2 0 If the company can choose only one project, which should it choose?

 Net Cash Flows Present Value of 1 at 9% Present Value of Net Cash Flows Project X1 Year 1 33000 0.917 30261 Year 2 43500 0.842 36627 Year 3 68500 0.772 52882 Totals \$119770 Amount invested (96000) 1.000 (96000) Net present value \$23770 Project X2 Year 1 72000 0.917 66024 Year 2 62000 0.842 52204 Year 3 52000 0.772 40144 Totals \$158372 Amount invested (141000) 1.000 (141000) Net present value \$17372

Profitability Index = Present value of Net Cash Flows / Amount invested

Project X1 = 119770/96000 = 1.25

Project X2 = 158372/141000 1.12