consider the following two projects: ......................... Project A1- inves

Question

consider the following two projects: ......................... Project A1- investment required at n=0 is $900,000..1= $400,000 , 2=$340,000 , 3=$300,000 , 4=$240,000 , 5=$200,000 , 6=$150,000.................................. Project A2- investment required at n=0 is $1,200,000...1=$200,000 , 2=$300,000 , 3=$350,000 , 4=$440,000 , 5=$400,000 , 6=$350,000 (a)calculate the profitability index for A1 and A2 at an interest rate of 6%. (b)determine which projects you should accept (1) if you have enough money to undertake both and (2) if you could take only one due to a budget limit.

Explanation / Answer

Hi, Please find the answer as follows: Project A1 Present Value of Future Cash Inflows = 400000/(1+.06)^1 + 340000/(1+.06)^2 + 300000/(1+.06)^3 + 240000/(1+.06)^4 + 200000/(1+.06)^5 + 150000/(1+.06)^6 = 1377141.26 PI = 1377141.26/900000 = 1.53 Project A2 Present Value of Future Cash Inflows = 200000/(1+.06)^1 + 300000/(1+.06)^2 + 350000/(1+.06)^3 + 440000/(1+.06)^4 + 400000/(1+.06)^5 + 350000/(1+.06)^6 = 1643705.60 PI = 1643705.60/1200000 = 1.37 We can accept both the projects if we have enough money. We should accept project A2 is we have budget limit. Thanks, Aman

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