Question

Following is information on two alternative investments being
considered by Jolee Company. The company requires a 8% 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 A | Project B | |||||||||

Initial investment | $ | (190,325 | ) | $ | (156,960 | ) | ||||

Expected net cash flows in year: | ||||||||||

1 | 37,000 | 30,000 | ||||||||

2 | 42,000 | 47,000 | ||||||||

3 | 80,295 | 52,000 | ||||||||

4 | 79,400 | 72,000 | ||||||||

5 | 55,000 | 21,000 | ||||||||

**a.** For each alternative project compute the net
present value.

**b.** For each alternative project compute the
profitability index. If the company can only select one project,
which should it choose?

Answer #1

NPV: | Project A | Project B | ||||

Year | PVF at 8% | Cashflows | Present value | Cashflows | Present value | |

1 | 0.925926 | 37000 | 34259.26 | 30000 | 27777.78 | |

2 | 0.857339 | 42000 | 36008.23 | 47000 | 40294.92 | |

3 | 0.793832 | 80295 | 63740.76 | 52000 | 41279.28 | |

4 | 0.73503 | 79400 | 58361.37 | 72000 | 52922.15 | |

5 | 0.680583 | 55000 | 37432.08 | 21000 | 14292.25 | |

Present value of inflows | 229802 | 176566 | ||||

Less: Investment | 190325 | 156960 | ||||

NPV: | 39477 | 19606 | ||||

Profitability Index: | ||||||

Project A | Project B | |||||

Present value of cashflows | 229802 | 176566 | ||||

Divide: Investment | 190325 | 156960 | ||||

Profitability index | 1.21 | 1.12 | ||||

Project A shall be accepted | ||||||

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(Use appropriate factor(s) from the tables
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