You are asked to evaluate the following two projects for the Norton Corporation.

Question

You are asked to evaluate the following two projects for the Norton Corporation. Use a discount rate of 14 percent. Use Appendix B.

Calculate the profitability index for project X. (Round "PV Factor" to 3 decimal places. Round your "present value inflows" to the nearest whole dollar amount. Round your final answer to 2 decimal places.)

Calculate the profitability index for project Y. (Round "PV Factor" to 3 decimal places. Round your "present value inflows" to the nearest whole dollar amount. Round your final answer to 2 decimal places.)

Project X (Videotapes
of the weather report)
($20,000 investment)
Project Y (Slow-motion
replays of commercials)
($40,000 investment)
Year Cash flow Year Cash flow 1 $ 10,000 1 $ 20,000 2 8,000 2 13,000 3 9,000 3 14,000 4 8,600 4 16,000

Explanation / Answer

PI = PV of CFs/Inital Inv For Proj X : Initial Inv = 20000 PV of CFs = NPV(Rate, CF1..Cf4) = NPV(14%,10000,8000,9000,8600) = $26,094 So PI for Proj X = $26,094/20000 = 1.30 For Proj Y : Initial Inv = 40000 PV of CFs = NPV(Rate, CF1..Cf4) = NPV(14%,20000,13000,14000,16000) = $46,470 So PI for Proj Y = $46,470/40000 = 1.16

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