Question

Exercise 11-10 NPV and profitability index LO P3

Following is information on two alternative investments being considered by Jolee Company. The company requires a 10% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

	Project A					Project B
Initial investment		$	(176,325	)			$	(150,960	)
Expected net cash flows in year:
1			37,000					26,000
2			55,000					51,000
3			77,295					53,000
4			93,400					78,000
5			58,000					37,000

a. For each alternative project compute the net present value.
b. For each alternative project compute the profitability index. If the company can only select one project, which should it choose?

Required A

For each alternative project compute the net present value.

Project A
Initial Investment		$176,325
Chart Values are Based on:
i =	10%
Year	Cash Inflow	x	PV Factor	=	Present Value
1	-176,325		1.2000	=
2				=
3				=
4				=
5	58,000,000	x		=
Present value of cash inflows
Present value of cash outflows
Net present value
Project B
Initial Investment		$150,960
Year	Cash Inflow	x	PV Factor	=	Present Value
1	-150,960			=
2				=
3				=
4				=
5				=
Present value of cash inflows
Present value of cash outflows
Net present value

Required B

For each alternative project compute the profitability index. If the company can only select one project, which should it choose?

Profitability Index
	Choose Numerator:	/	Choose Denominator:	=	Profitability Index
	Present value of net cash flows	/	Initial investment	=	Profitability index
Project A			$176,325	=	0.00
Project B			$150,960	=	0.00
If the company can only select one project, which should it choose?

Answer 1