Question

A company is considering two mutually exclusive projects, the company’s required return is 8 percent and...

A company is considering two mutually exclusive projects, the company’s required return is 8 percent and they do not have any capital constraints. Based on the profitability index, what is your recommendation concerning these projects? Project A Project B Year Cash Flow Year Cash Flow 0 -$38,500 0 -$42,000 1 $20,000 1 $10,000 2 $24,000 2 $40,000

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1
Computation of profitability index
year Cash flow A Cash flow B PVIF @ 8% Present value A Present value B
1 20000 10000 0.925926 18518.52 9259.259
3 24000 40000 0.857339 20576.13 34293.55
a Present value of cash inflow 39094.65 43552.81
b Outflow 38500 42000
c=a/b Profitability index         1.02         1.04
Since profitability index of project B is higher therefore firm should select project B
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
A company is considering two mutually exclusive projects, the company’s required return is 8 percent and...
A company is considering two mutually exclusive projects, the company’s required return is 8 percent and they do not have any capital constraints. Based on the profitability index, what is your recommendation concerning these projects? Project A Project B Year Cash Flow Year Cash Flow 0 -$38,500 0 -$42,000 1 $20,000 1 $10,000 2 $24,000 2 $40,000
You are considering the following two mutually exclusive projects with the following cash flows:                           &nbsp
You are considering the following two mutually exclusive projects with the following cash flows:                                                                                  Project A                                  Project B                                                             Year    Cash Flow                   Year    Cash Flow                                                             0          -$75,000                         0       -$70,000                                                             1          $19,000                         1       $10,000                                                             2          $48,000                         2       $16,000                                                             3          $12,000                         3       $72,000                        Required rate of return                     10 %                                        13 %                             Calculate the NPV, IRR,...
you are considering the following two mutually exclusive projects. the require return in each project is...
you are considering the following two mutually exclusive projects. the require return in each project is 12 percent. which project you should accept and what the best reason for the decision? year project A project B 0 -$10,000 -$ 20,000 1 3,000 5,000 2 8,000 7,000 3 4,000 12,000 4 $ 2,000 $ 10,000 A.project A because it pays back faster B. project A because it has the higher profitability index C.project B because it has the higher profitability index...
You are considering the following two mutually exclusive projects. The required rate of return is 12%...
You are considering the following two mutually exclusive projects. The required rate of return is 12% for project A and 11% for project B. Which project should you accept and why? Year Project A Project B 0           -$68,000   -$75,000 1                     28,000 15,000 2                     20,000   20,000 3                     20,000 20,000 4                     10,000 30,000
19. Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown...
19. Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 10 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.   Time: 0 1 2 3   Project A Cash Flow -32,000 22,000 42,000 13,000   Project B Cash Flow -42,000 22,000 8,000 62,000 Use the payback decision rule to evaluate...
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below....
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.   Time: 0 1 2 3   Project A Cash Flow -30,000 20,000 40,000 11,000   Project B Cash Flow -40,000 20,000 30,000 60,000 Use the NPV decision rule to evaluate these...
Consider the following cash flows for two mutually exclusive capital investment projects. The required rate of...
Consider the following cash flows for two mutually exclusive capital investment projects. The required rate of return is 16%. Use this information for the next 3 questions. Year Project A Cash Flow Project B Cash Flow 0 ($50,000) ($20,000) 1 15,000 6,000 2 15,000 6,000 3 15,000 6,000 4 13,500 5,400 5 13,500 5,400 6 6,750 5,400 What is the profitability index of project B? Answers: a.1.06 b. 1.01 c.1.09 d. 1.03 e. .94
Question 1 A company is deciding among two mutually exclusive projects. Project A’s initial cost is...
Question 1 A company is deciding among two mutually exclusive projects. Project A’s initial cost is $40,000, and Project B’s initial cost is 30,000. The two projects have the following cash flows:                               Project A           Project B                Year           Cash Flow     Cash Flow                  1               10,000               8,000                  2               15,000              12,000                  3               20,000              20,000                  4               20,000              15,000 The company's weighted average cost of capital is 11 percent. What is the net present value (NPV) of the project A?...
1.      Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown...
1.      Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively. Time 0 1 2 3 Project A Cash Flow ?20,000 10,000 30,000 1,000 Project B Cash Flow ?30,000 10,000 20,000 50,000 Use the MIRR decision rule to evaluate...
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as...
Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 8 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and three years, respectively. Time 0 1 2 3 Project A Cashflow -20,000 10,000 30,000 1,000 Project B Cashflow -30,000 10,000 20,000 50,000 Calculate the NPV and use the NPV decision rule to...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT