Question

Robben Manufacturing has the following two possible projects. The required return is 13 percent. Year Project Y Project Z 0 –$ 28,600 –$ 51,000 1 14,600 14,000 2 13,000 37,000 3 15,400 12,000 4 11,000 35,000 a. What is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.) Profitability index Project Y Project Z b. What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) NPV Project Y $ Project Z $ c. Which, if either, of the projects should the company accept?

Answer 1

a. profitability index=  Present value of Cash Inflows /Present value of Cash Outflows

Project Y :

= $ 40,520.74 / $ 28,600

= 1.417

Project Z :

= $ 71,148.57 /$ 51,000

=1.395

b. NPV = Present value of Cash Inflows - Present value of Cash Outflows

Project Y :

= $ 14,600 * 1/(1.13) ^ 1+ $ 13,000 * 1/(1.13) ^ 2+ $ 15,400 * 1/(1.13) ^3 + $ 11,000 * 1/(1.13) ^4 - $ 28,600

= $ 40,520.74 - $ 28,600

= $ 11,920.74

Project Z :

= $ 14,000 * 1/(1.13) ^ 1+ $ 37,000 * 1/(1.13) ^ 2+ $ 12,000 * 1/(1.13) ^3 + $ 35,000 * 1/(1.13) ^4 - $ 51,000

= $ 71,148.57 - $ 51,000

= $ 20,148.57

c. The correct answer is Project Z  must be accepted as it has a higher NPV