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	–$	52,000			–$	26,800
1		25,300				13,800
2		25,300				13,800
3		25,300				13,800

   

a-1.

If the required return is 10 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.)

b-1.	What is the NPV for each project?

Answer 1

a1)

Profitability Index = PV of future cashflows/Initial investment

Profitability Index of Cash Flow (I) = 1.210

Profitability Index of Cash Flow (II) = 1.281

b1)

NPV of Cash Flow (I) = 10917.355

NPV of Cash Flow (II) = 7518.557