Question

Cori's Sausage Corporation is trying to choose between the following two mutually exclusive design projects:

  

Year	Cash Flow (I)				Cash Flow (II)
0	–$	51,000			–$	25,800
1		25,000				13,500
2		25,000				13,500
3		25,000				13,500

   

a-1.	If the required return is 12 percent, 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.)

      

Answer 1

Year	NPV @ 12%	Cash inflows (I)	Present value of cash inflows (I)	Cash inflows (II)	Present value of cash inflows (II)
1	0.893	25,000	22,325	13,500	12,055.5
2	0.797	25,000	19,925	13,500	10,759.5
3	0.712	25,000	17,800	13,500	9,612
TOTAL			60,050		32,427

Present value of cash outflow (I) = 51,000

Present value of cash outflow (II) = 25,800

Project II is better than Project I because its profitability index is higher.