Use the NPV method to determine whether Juda Products should invest in the follo

Question

Use the NPV method to determine whether Juda Products should invest in the following projects: Project A: Costs $290,000 and offers seven annual net cash inflows of $57,000. Juda Products requires an annual return of 14% on investments of this nature. Project B: Costs $395,000 and offers 10 annual net cash inflows of $70,000. Juda Products demands an annual return of 12% on investments of this nature. What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places. What is the maximum acceptable price to pay for each project? What is the profitability index of each project? Round to two decimal places.

Explanation / Answer

Years Project A 1to 7 Present value of annuity 57000 4.2883 244433.4 Now Initial investment -290000 1 -290000 Net present value of the project -45567 Project B 1 to10 Present value of annuity 70000 5.6502 395515.6 Now Initial investment -395000 1 -395000 Net present value of the project 516 A B The maximum acceptable price 244433.4 395515.6 A B Present value of net cash inflows 244433.4 395515.6 Profitability Index =Present value of net cash inflows/Initial investment 0.84 1.00 Year A B 0 -290000 -395000 1 57000 70000 2 57000 70000 3 57000 70000 4 57000 70000 5 57000 70000 6 57000 70000 7 57000 70000 8 0 70000 9 0 70000 10 0 70000 IRR Using Execel IRR Funtion 8.68% 12.03%

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