11-10 Following is information on two alternative investments being considered b
ID: 2597097 • Letter: 1
Question
11-10
Following is information on two alternative investments being considered by Jolee Company. The company requires a 6% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)
a. For each alternative project compute the net present value.
b. For each alternative project compute the profitability index. If the company can only select one project, which should it choose?
Explanation / Answer
Jolee Company
Computation of the net present value for each alternative projects:
Project A
Initial Investment
$180,325
Chart values are based on
i=
6%
Year
Cash Inflow
x
PV Factor
=
Present Value
1
$53,000
0.9434
$50,000
2
$47,000
0.89
$41,830
3
$87,295
0.8396
$73,293
4
$78,400
0.7921
$62,101
5
$62,000
0.7473
$46,333
$273,557
Present value of cash inflows
$273,557
Present value of cash outflow
$180,325
Net Present value
$93,232
Project B
Initial Investment
$152,960
i=
6%
Year
Cash Inflow
x
PV Factor
=
Present Value
1
$31,000
0.9434
$29,245
2
$58,000
0.89
$51,620
3
$57,000
0.8396
$47,857
4
$81,000
0.7921
$64,160
5
$25,000
0.7473
$18,683
$211,565
Present value of cash inflows
$211,565
Present value of cash outflow
$152,960
Net Present Value
$58,605
Computation of profitability index for each alternative project:
Profitability Index
Choose Numerator
/
Choose Denominator
=
Profitability Index
(Initial investment + NPV)
/
Initial Investment
=
Profitability Index
Project A
$273,557
$180,325
1.52
Project B
$211,565
$152,960
1.38
If the company can only select one project, it should choose
Project A
Notes:
Project A
Initial Investment
$180,325
Chart values are based on
i=
6%
Year
Cash Inflow
x
PV Factor
=
Present Value
1
$53,000
0.9434
$50,000
2
$47,000
0.89
$41,830
3
$87,295
0.8396
$73,293
4
$78,400
0.7921
$62,101
5
$62,000
0.7473
$46,333
$273,557
Present value of cash inflows
$273,557
Present value of cash outflow
$180,325
Net Present value
$93,232
Project B
Initial Investment
$152,960
i=
6%
Year
Cash Inflow
x
PV Factor
=
Present Value
1
$31,000
0.9434
$29,245
2
$58,000
0.89
$51,620
3
$57,000
0.8396
$47,857
4
$81,000
0.7921
$64,160
5
$25,000
0.7473
$18,683
$211,565
Present value of cash inflows
$211,565
Present value of cash outflow
$152,960
Net Present Value
$58,605
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.