The Weiland Computer Corporation is trying to choose between the following two m
ID: 2667394 • Letter: T
Question
The Weiland Computer Corporation is trying to choose between the following two mutually exclusive design projects:
Year Cash Flow (I) Cash Flow (II)
0 –$23,000 –$9,800
1 13,000 5,500
2 13,000 5,500
3 13,000 5,500
The required return is 16 percent.
Required:
(a)
The profitability index for Projects I and II is(________) and(________), respectively. (Round your answers to 3 decimal places.
(b)
The NPV for Projects I and II is (______) and (________), respectively. If Weiland On Computer applies the NPV decision rule, it should accept Project ( I / II ).
Explanation / Answer
Cash Flows I
Year
Cash flows
PV Factor at 16%
Net Present Value
0
($23,000)
1
($23,000)
1
$13,000
0.8621
$11,207.30
2
$13,000
0.7432
$9,661.60
3
$13,000
0.6407
$8,329.10
Net Present Value
$6,198.00
Profitability Index = [(Net Present Value + Initial Investment) / Initial Investment]
Profitability Index = [($6,198 + $23,000) / $23,000]
Profitability Index = 1.27
Cash Flows II
Year
Cash flows
PV Factor at 16%
Net Present Value
0
($9,800)
1
($9,800)
1
$5,500
0.8621
$4,741.55
2
$5,500
0.7432
$4,087.60
3
$5,500
0.6407
$3,523.85
Net Present Value
$2,553.00
Profitability Index = [(Net Present Value + Initial Investment) / Initial Investment]
Profitability Index = [($2,553 + $9,800) / $9,800]
Cash Flows I
Year
Cash flows
PV Factor at 16%
Net Present Value
0
($23,000)
1
($23,000)
1
$13,000
0.8621
$11,207.30
2
$13,000
0.7432
$9,661.60
3
$13,000
0.6407
$8,329.10
Net Present Value
$6,198.00
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