Question

# Robben Manufacturing has the following two possible projects. The required return is 13 percent. Year Project...

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?

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

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