Question

Jill Harrington, a manager at Jennings Company, is considering several potential capital investment projects. Data on these projects follow: Project X Project Y Project Z Initial investment $40,000 $20,000 $50,000 Annual cash inflows 25,000 10,000 25,400 PV of cash inflows 45,000 33,000 70,000 Required: 1. Compute the payback period for each project and rank order them based on this criterion. (Round your answers to 2 decimal places.) 2. Compute the NPV of each project and rank order them based on this criterion. 3. Compute the profitability index of each project and rank order them based on this criterion. (Round your answers to 2 decimal places.) 4. If Jennings has limited funds to invest, which ranking should Jill recommend? Payback Ranking NPV Ranking Profitability Index Ranking

Answer #1

1. payback period is the number of years in which the initial investment of a project is recovered.

Payback period = Investment / Annaul cash flows

Project X = $40000/25000 = 1.6 years

Project Y = $20000/10000 = 2 Years

Project Z = $50000/25400 = 1.97 years

2. NPV = Present value of cash inflows - cash outflows

Project X = $45000 - 25000 = $20000

Project Y = $33000 - 10000 = $23000

Project Z = $70000 - 25400 = $44600

3. Profitability index = Present value of cash inflows / cash outflows.

Project X = $45000 / 25000 = 1.8

Project Y = $33000 / 10000 = 3.3

Project Z = $70000 / 25400 = 2.76

4. The ranking is as below:

Payback period | NPV | Profitabiltiy Index | |

Project X | 1 | 3 | 2 |

Project Y | 3 | 2 | 1 |

Project Z | 2 | 1 | 3 |

Jill Harrington, a manager at Jennings Company, is considering
several potential capital investment projects. Data on these
projects follow:
Project X
Project Y
Project Z
Initial
investment
$40,000
$20,000
$50,000
Annual cash
inflows
25,000
10,000
25,400
PV of cash
inflows
45,000
33,000
70,000
Required:
1. Compute the payback period for each project and rank
order them based on this criterion. (Round your answers to
2 decimal places.)
Payback Period
Rank
Project
X
Project
Y
Project Z
2. Compute the...

Jill Harrington, a manager at Jennings Company, is considering
several potential capital investment projects. Data on these
projects follow:
Project X
Project Y
Project Z
Initial Investment
40,000
20,000
50,000
Annual Cash Inflows
25,000
10,000
25,400
pv of cash inflows
45,000
33,000
70,000
1. Compute the payback period for each project
and rank order them based on this criterion.
2. Compute the NPV of each project and rank
order them based on this criterion.
3. Compute the profitability index of...

Amazon Corporation is considering two long-term capital
investment proposals. Relevant data on each project are as
follows.
Project Milo
Project Otis
Capital investment
$196,000
$223,000
Annual net cash flows:
Year
1
64,644
64,748
2
55,388
64,748
3
52,459
64,748
4
49,686
64,748
5
47,235
64,748
Total
$ 269.412
$323,740
Other information: The company’s minimum rate of return is the
company’s cost of capital which is 12%. Assume cash flows occur
evenly throughout the year.
Instructions:
Compute the following...

The management of Revco Products is exploring five different
investment opportunities. Information on the five projects under
study follows:
Project Number
1
2
3
4
5
Investment required
$
(264,000
)
$
(435,000
)
$
(418,000
)
$
(364,000
)
$
(500,000
)
Present value of cash inflows at a 10%
discount rate
334,640
510,970
398,360
444,600
579,200
Net present value
$
70,640
$
75,970
$
(19,640
)
$
80,600
$
79,200
Life of the project
6 years
3 years...

A firm is considering two capital investment projects. Project A
involves an initial cost of $15,000. The discounted present value
of all future cash flows is $18,000. Project B requires an initial
expenditure of $25,000. The discounted present value of all future
cash flows is $29,000.
(i)
Calculate the net present value of each of the two projects.
Which would be preferred according to the net present value
criterion?
(ii)
Calculate the profitability index of each of the two projects....

Consider the following two mutually exclusive projects:
Year Cash Flow
(A) Cash Flow
(B)
0 –$ 341,000 –$ 51,000
1 54,000 24,900
2 74,000 22,900
3 74,000 20,400
4 449,000 15,500
Whichever project you choose, if any, you require a return of
15 percent on your investment.
a-1 What is the payback period for each project? (Do not round
intermediate calculations and round your answers to 2 decimal
places, e.g., 32.16.)
a-2...

Exercise 13-5 Preference Ranking [LO13-5]
Information on four investment proposals is given below:
Investment Proposal
A
B
C
D
Investment required
$
(60,000
)
$
(70,000
)
$
(40,000
)
$
(990,000
)
Present value of cash inflows
88,000
97,300
64,200
1,318,700
Net present value
$
28,000
$
27,300
$
24,200
$
328,700
Life of the project
5 years
7 years
6 years
6 years
Required:
1. Compute the project profitability index for each investment
proposal. (Round your answers to...

Shaylee Corp has $2.00 million to invest in new projects. The
company’s managers have presented a number of possible options that
the board must prioritize. Information about the projects
follows:
Project A
Project B
Project C
Project D
Initial investment
$
428,000
$
243,000
$
733,000
$
958,000
Present value of future cash flows
778,000
428,000
1,213,000
1,573,000
Required:
1. Is Shaylee able to invest in all of these
projects simultaneously?
2-A. Calculate the profitability index for each
project....

Offshore Drilling Products, Inc., imposes a payback cutoff of
three years for its international investment projects. Assume the
company has the following two projects available.
Year
Cash Flow A
Cash Flow B
0
–$
49,000
–$
94,000
1
19,000
21,000
2
25,400
26,000
3
21,000
33,000
4
7,000
246,000
Requirement 1:
What is the payback period for each project? (Enter
rounded answers as directed, but do not use the rounded numbers in
intermediate calculations. Round your answers to 2...

The Petty Co. is considering the following three investment
projects.
Use the following information to answer the
question:
American Girl
Free Falling
Breakdown
Present value of cash inflows
$23,200
$58,200
$78,000
Investment Required
$20,000
$48,000
$76,000
Regarding the Net Present Value, which statement is true?
1)
Based on NPV, the Breakdown Project
ranks highest.
2)
Based on NPV, the American Girl Project
ranks lowest.
3)
Based on NPV, the Free Falling Project ranks the highest.
4)
None of the above....

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