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