You are asked to evaluate the following two projects for the Norton corporation. Use a discount rate of 14 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Project X (Videotapes of the Weather Report) ($30,000 Investment) |
Project Y (Slow-Motion Replays of Commercials) ($50,000 Investment) |
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Year | Cash Flow | Year | Cash Flow | |||||||
1 | $ | 15,000 | 1 | $ | 25,000 | |||||
2 | 13,000 | 2 | 18,000 | |||||||
3 | 14,000 | 3 | 19,000 | |||||||
4 | 13,600 | 4 | 21,000 | |||||||
a. Calculate the profitability index for project
X. (Do not round intermediate calculations
and round your answer to 2 decimal places.)
b. Calculate the profitability index for project
Y. (Do not round intermediate calculations and round your
answer to 2 decimal places.)
c. Which project would you select based on the profitability index?
Project X
Project Y
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