Question

Fabulous Fabricators needs to decide how to allocate space in its production facility this year. It is considering the following​ contracts:

Contract	NPV	Use of Facility
A	$2.04 million	100%
B	$0.96 million	58%
C	$1.51 million	42%

a. What are the profitability indexes of the​ projects?

b. What should Fabulous Fabricators​ do?

a. What are the profitability indexes of the​ projects?

The profitability index for contract A is

nothing.

​(Round to two decimal​ places.)

Answer 1

a. PI of Contract A is as follows:

= NPV / Use of facility

= $ 2.04 million / 100%

= 2.04

PI of Contract B is as follows:

= NPV / Use of facility

= $ 0.96 million / 58%

= 1.66

PI of Contract C is as follows:

= NPV / Use of facility

= $ 1.51 million / 42%

= 3.60

b. Since the combined NPV of both contracts B and C ($ 2.47 million i.e. $ 0.96 million + $ 1.51 milion) is greater than the NPV of contract A of $ 2.04 million, hence the firm shall accept both Contract B and Contract C