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 $ (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?

Answer 1

	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