The Robb Computer Corporation is trying to choose between the following two mutu

Question

The Robb Computer Corporation is trying to choose between the following two mutually exclusive design projects:

Year Cash Flow (I) Cash Flow (II)
0 $ -59,000 $ -15,700
1 32,000 9,400
2 32,000 9,400
3 32,000 9,400

(a)

If the required return is 18 percent, what is the profitability index for each project? (Round your answers to 3 decimal places. (e.g., 32.161))



Profitability Index
Project I


Project II



(b)

Calculate the NPV for each project assuming a required return of 18 percent. Round your answers to 2 decimal places. (e.g., 32.16))



NPV
Project I $

Project II $

Explanation / Answer

a Profitability Index Project I = (32,000/1.18+ 32,000/1.18^2 +32,000/1.18^3)/59,000 = 1.179 Profitability Index Project II = (9,400 /1.18+ 9,400 /1.18^2 +9,400 /1.18^3)/15700 = = 1.302 b NPV Project I = -59,000 +(32,000/1.18+ 32,000/1.18^2 +32,000/1.18^3) = $10,576.73 NPV Project II = 9,400 /1.18+ 9,400 /1.18^2 +9,400 /1.18^3 - 15700 = $4,738.17

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