Question

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

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.)


      

Homework Answers

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.

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