The treasurer of Tropical Fruits, Inc., has projected the cash
flows of Projects A, B, and C as follows:
| Year | Project A | Project B | Project C | ||||||||
| 0 | ?$ | 170,000 | ?$ | 320,000 | ?$ | 170,000 | |||||
| 1 | 114,000 | 208,000 | 124,000 | ||||||||
| 2 | 114,000 | 208,000 | 94,000 | ||||||||
Suppose the relevant discount rate is 12 percent per year.
a. Compute the profitability index for each of the
three projects. (Do not round intermediate calculations and
round your answers to 2 decimal places, e.g.,
32.16.)
|
Profitability index |
|
| Project A | |
| Project B | |
| Project C | |
b. Compute the NPV for each of the three projects.
(Do not round intermediate calculations and round your
answers to 2 decimal places, e.g., 32.16.)
| NPV | |
| Project A | $ |
| Project B | $ |
| Project C | $ |
c. Suppose these three projects are independent.
Which project(s) should the company accept based on the
profitability index rule?
Project A
Project B
Project C
Project A, Project B, Project C
Project A, Project B
Project A, Project C
Project B, Project C
d. Suppose these three projects are mutually
exclusive. Which project(s) should the company accept based on the
profitability index rule?
Project A
Project B
Project C
Project A, Project B, Project C
Project A, Project B
Project A, Project C
Project B, Project C
e. Suppose the budget for these projects is
$490,000. The projects are not divisible. Which project(s) should
be accepted?
Project A
Project B
Project C
Project A, Project B, Project C
Project B, Project C
Project B, Project A
Project A, Project C
| Year | Project A | Project B | Project C |
| 0 | -170,000.00 | -320,000.00 | -170,000.00 |
| 1 | 114,000.00 | 208,000.00 | 124,000.00 |
| 2 | 114,000.00 | 208,000.00 | 94,000.00 |
| Cost of capital | 12% | ||
| Project A | Project B | Project C | |
| NPV | 22,665.82 | 31,530.61 | 15,650.51 |
| Profitability index | 1.13 | 1.10 | 1.09 |
| Projects are independent | |||
| Based on profitability index rule project A,Project B and Project C should be selected as PI is more than 1 for all three | |||
| Projects are mutually exclusive | |||
| Based on profitability index rule project A should be selected as PI is highest | |||
| Budget | 490,000.00 | ||
| Project A and Project B should be selected | |||
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