Question

Courtesy Caravan, Inc. may invest in only one of three new projects. Due to other capital...

Courtesy Caravan, Inc. may invest in only one of three new projects. Due to other capital constraints, they have decided to base their decision on each project’s profitability index. The company has a cost of capital of 9.0%.

Cash Flows (millions)
Year 0 Year 1 Year 2 Year 3 Year 4
Project A (280 ) 100 130 150 200
Project B (300 ) 130 150 180 190
Project C (380 ) 160 180 200 260

a. What is the profitability index for each project? (Round your answers to four decimal places.)

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Formula for profitability index = (NPV + Initial investment) / Initial investment

For Project A

0 1 2 3 4
Cashflow -280 100 130 150 200
present value -280 91.74312 109.4184 115.827522 141.6850422
NPV 178.67
Profitability Index 1.6381

For project B

0 1 2 3 4
Cashflow -300 130 150 180 190
present value -300 119.2661 126.252 138.9930264 134.6007901
NPV 219.11
Profitability Index 1.7304

For project C

0 1 2 3 4
Cashflow -380 160 180 200 260
present value -380 146.789 151.5024 154.436696 184.1905549
NPV 256.92
Profitability Index 1.6761
0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You are the finance manager for Monkey Manufacturing Company. You have identified 5 new projects that...
You are the finance manager for Monkey Manufacturing Company. You have identified 5 new projects that you are considering for the next financial year. The results of your analysis are presented in the table below: Project Initial Payback Net Internal Profitability Investment Period Present Value Rate of Return Index ($million) (years) ($million) (%) A 20.00 2.5 13.8 12.2 B 10.00 3.1 7.1 12.5 C 5.00 4.2 3.4 12.3 D 5.00 2.9 3.0 11.9 E 5.00 3.4 3.7 12.8 a)       Calculate the...
The managers of Kenforest Grocers are trying to determine the company's optimal capital budget for the...
The managers of Kenforest Grocers are trying to determine the company's optimal capital budget for the upcoming year. Kenforest is considering the following projects: (a) No budget limitation (b) limit to $230 million Project Required investment (in millions) Risk-adjusted WACC NPV (in millions) Profitability Index Ranking Available Capital Ranking A $200 $50 B 70 45 C 150 40 D 30 30 E 120 20 F 100 5 G 50 -1 H 10 -5 Which of the projects will the company...
Most Company has an opportunity to invest in one of two new projects. Project Y requires...
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $340,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $340,000 investment for new machinery with a five-year life and no salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year. (PV of $1, FV of $1, PVA of $1, and FVA...
Most Company has an opportunity to invest in one of two new projects. Project Y requires...
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $340,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $340,000 investment for new machinery with a five-year life and no salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year. (PV of $1, FV of $1, PVA of $1, and FVA...
Most Company has an opportunity to invest in one of two new projects. Project Y requires...
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $320,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $320,000 investment for new machinery with a four-year life and no salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year. (PV of $1, FV of $1, PVA of $1, and FVA...
Most Company has an opportunity to invest in one of two new projects. Project Y requires...
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $320,000 investment for new machinery with a five-year life and no salvage value. Project Z requires a $320,000 investment for new machinery with a four-year life and no salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year. (PV of $1, FV of $1, PVA of $1, and FVA...
Estimating the cash flow generated by $1 invested in investment The profitability index (PI)is a capital...
Estimating the cash flow generated by $1 invested in investment The profitability index (PI)is a capital budgeting tool that provides another way to compare a project’s benefits and costs. It is computed as a ratio of the discounted value of the net cash flows expected to be generated by a project over its life (the project’s expected benefits) to its net cost (NINV). A project’s PI value can be interpreted to indicate a project’s discounted return generated by each dollar...
Due to a restricted capital budget, a company can undertake only one of the following three-year...
Due to a restricted capital budget, a company can undertake only one of the following three-year projects. Both require an initial investment of $650,000 and will have no significant terminal value. Project XXX is anticipated to have annual profits of $400,000, $300,000, and $200,000 in successive years, whereas Project YYY’s only profit, $1.05 million, comes at the end of Year 3. a. Calculate the IRR of each project.
Most Company has an opportunity to invest in one of two new projects. Project Y requires...
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $340,000 investment for new machinery with a six-year life and no salvage value. Project Z requires a $340,000 investment for new machinery with a five-year life and no salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year. (PV of $1, FV of $1, PVA of $1, and FVA...
Due to a restricted capital budget, a company can undertake only one of the following three-year...
Due to a restricted capital budget, a company can undertake only one of the following three-year projects. Both require an initial investment of $650,000 and will have no significant terminal value. Project XXX is anticipated to have annual profits of $400,000, $300,000, and $200,000 in successive years, whereas Project YYY’s only profit, $1.05 million, comes at the end of Year 3. a. Calculate the IRR of each project. b. On the basis of their IRRs, which project should be selected?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT