Question

The Petty Co. is considering the following three investment projects.

Use the following information to answer the question:

	American Girl	Free Falling	Breakdown
Present value of cash inflows	$23,200	$58,200	$78,000
Investment Required	$20,000	$48,000	$76,000

Regarding the Net Present Value, which statement is true?

1)	Based on NPV, the Breakdown Project ranks highest.

2)	Based on NPV, the American Girl Project ranks lowest.

3)	Based on NPV, the Free Falling Project ranks the highest.

4)	None of the above.

Use the following information to answer the question:

	American Girl	Free Falling	Breakdown
Present value of cash inflows	$23,200	$58,200	$78,000
Investment Required	$20,000	$48,000	$76,000

Regarding the Profitability Index (PI), which statement is true?

1)	American Girl Project’s PI is .16.

2)	American Girl Project’s PI is .862.

3)	American Girl Project’s PI is 1.16.

4)	None of the above.

	American Girl	Free Falling	Breakdown
Present value of cash inflows	$23,200	$58,200	$78,000
Investment Required	$20,000	$48,000	$76,000

Regarding the Profitability Index, rank each project from most to least desirable.

1)	1st American Girl Project, 2nd Free Falling Project, 3rd Breakdown Project.

2)	1st Breakdown Project, 2nd American Girl Project, 3rd Free Falling Project.

3)	1st Free Falling Project, 2nd Breakdown Project, 3rd American Girl Project.

4)	1st Free Falling Project, 2nd American Girl Project, 3rd Breakdown Project.

Answer 1

The NPV =PV of Inflows -Initial Outflow

Here the PV of inflows is given and initial outflow is aslo given

For American Girl The PV of Inflows =$23,200 And initial outflow =$20,000

So NPV =$3,200

For Free falling the PV of Inflows =$58,200 and initial outflow = $48,000

NPV =$58,200-$48,000 =$10,200

Fro Break Down the PV of inflows =$78,000 and initial outflow =$76,000

NPV =$78,000-$76,000=$2,000

Answer:3)Based on NPV the Free falling project ranks the highest

PI(Profitability Index)

PI=PV of inflows /Initial outflow

The PI of American Girl Project =$23,200/$20,000=1.16

Answer:3)The PI of American Girl Project =1.16

The PI of Free fall project =$58,200/$48,000=1.2125

The PI of Break Down project =$78,000/$76,000=1.026

Ranking them

Answer:4)1st Free Falling project ,2nd American Girl project ,3rd Break Down Project

answered by: anonymous