Dahlia Manufacturing has the following two possible projects. The required retur

Question

Dahlia Manufacturing has the following two possible projects. The required return is 12 percent.

Year (0-4) Project Y: -$28500, 14500, 12900, 15300, 10900

Year Project Z: -$50000, 14500, 36000, 12500, 34000

Required: (a) What is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 3 decimal places (e.g., 32.161).) Profitability index Project Y Project Z (b) What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) NPV Project Y $ Project Z $ (c) Which, if either, of the projects should the company accept?

Explanation / Answer

a)
for project Y

PV of cash flows = 14500/(1.12) + 12900/(1.12)^2 + 15300/(1.12)^3 + 10900/1.12^4
= 41047.614438

profitibality index of Y = 41047.614438/28500 = 1.440

for project Z

PV of cash flows = 14500/(1.12) + 36000/(1.12)^2 + 12500/(1.12)^3 + 34000/1.12^4
= 72150.2759267

profitability index of Y = 72150.2759267/50000 = 1.443

b)

NPV of Y = -285000 + 41047.61 = 12547.61

NPV of Z = -50000 + 72150.28 = 22150.28

c)

we accept project Z

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