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

Question

You are asked to evaluate the following two projects for Boring Corporation. Use a discount rate of 10 percent. Use Appendix B.

Project X (DVDs
of the Weather Reports)
($58,000 Investment)

Project Y (Slow-Motion
Replays of Commercials)
($78,000 Investment)

YEAR CASH FLOW YEAR CASHFLOW

1 29,000 1 39,000

2 27,000 2 32,000

3 18,000 3 33,000

4 21,6000 4 35,000

Calculate the PI for project X. (Round "PV Factor" to 3 decimal places. Round the final answer to 2 decimal places.)

Calculate the profitability index for project Y. (Round "PV Factor" to 3 decimal places. Round the final answer to 2 decimal places.)

Using the NPV method combined with the PI approach, which project would you select? Use a discount rate of 10 percent.

You are asked to evaluate the following two projects for Boring Corporation. Use a discount rate of 10 percent. Use Appendix B.

Explanation / Answer

Project X Project Y Year 1 29000 39000 Year 2 27000 32000 Year 3 18000 33000 Year 4 21600 35000 a) PI = PV of future cash flows/ Initial Investment required Project X PV = CF1/ (1+r)1+ CF2/(1+r)2+CF3/(1+r)3+CF4/(1+r)4        = 29000 /(1+0.10)1 + 27000/(1+0.10)2+18000/(1+0.10)3+21600/(1+0.10)4        = 29000/1.01 +27000/1.21 + 18000/1.331 + 21600 /1.4641        = 28712.87 + 22314.05 + 13523.67 + 14753.09        =79303.68 1.367305 PI = 79303.68 / 58000      = 1.37 b) Project Y PV = CF1/ (1+r)1+ CF2/(1+r)2+CF3/(1+r)3+CF4/(1+r)4        = 39000 /(1+0.10)1 + 32000/(1+0.10)2+33000/(1+0.10)3+35000/(1+0.10)4        = 39000/1.01 +32000/1.21 + 33000/1.331 + 35000 /1.4641        = 113759 PI = 113759 / 78000      = 1.46 c) NPV Project X NPV = FV of cash flow- Initial investment           = 79303.68 - 58000           = 21303.68 Project Y NPV = FV of cash flow- Initial investment           = 113759-78000           = 35759 Project X Project Y NPV 21303.68 35759 PI 1.37 1.46 As for [Project Y , both NPV and PI are higher than Project X Project Y should be selected

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