Question

Exercise 24-11 Net present value, profitability index LO P3 Following is information on two alternative investments being considered by Tiger Co. The company requires a 7% 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 $ (86,000 ) $ (132,000 ) Expected net cash flows in year: 1 28,000 64,500 2 38,500 54,500 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

			Project X1		Project X2
Particulars	Year	PVF@7%	Amount	Present Value	Amount	Present Value
Cash Inflow	1	0.935	28000	$26,180	64500	$60,307.50
	2	0.873	38500	33,610.50	54500	47,578.50
	3	0.816	63500	51,816	44500	36,312
Present value of cash inflow				$111,605.50		$144,198
Less: Initial Investment	0	1	86000	$86000	132000	$132000
a. Net Present Value				$25,606.50		$12,198
b. Profitability index =Present value of cash inflow / Initial Investment				1.30		1.09