Jill Harrington, a manager at Jennings Company, is considering several potential
ID: 2532129 • Letter: J
Question
Jill Harrington, a manager at Jennings Company, is considering several potential capital investment projects. Data on these projects follow:
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.
4. If Jennings has limited funds to invest, which ranking should Jill recommend?
Initial investment Annual cash inflows PV of cash inflows Project X ProjectY Project Z $40,000 $20,000 S50,000 25,400 70,000 25,000 45,000 10,000 33,000Explanation / Answer
1. Payback Period = Initial Investment / Annual Cash Inflows
Project X = 40,000 / 25,000
= 1.60
Project Y = 20,000 / 10,000
= 2.00
Project Z = 50,000 / 25,400
= 1.97
Hence the correct answer is :
2. NPV = Present Value of Cash Inflows -Present Value of Cash Outflows
Project X = 45,000 - 40,000
= $ 5,000
Project Y = 33,000 - 20,000
= $ 13,000
Project Z = 70,000- 50,000
= $ 20,000
Hence the correct answer is :
3.
profitability index = Present Value of Cash inflows / Present Value of Cash Outflows
Project X = 45,000 / 40,000
= 1.13
Project Y = 33,000 / 20,000
= 1.65
Project Z = 70,000/ 50,000
= 1.40
Hence the correct answer is :
4. The correct answer is NPV Ranking
This method helps in chosing the best alternative available.
Payback period Rank Project X 1.60 3 Project Y 2.00 1 Project Z 1.97 2Related Questions
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