Given the discount rates and the future cash flow of each project listed, use th
ID: 2700743 • Letter: G
Question
Given the discount rates and the future cash flow of each project listed, use the PI to determine which projects the company should accept (it could be more than one).
Cash Flow
Project U
Project V
Year 0
-$2,100,000
-$2,600,000
Year 1
$525,000
$1,300,000
Year 2
$525,000
$1,050,000
Year 3
$525,000
$800,000
Year 4
$525,000
$550,000
Year 5
$525,000
$300,000
Discount rate
5%
11%
Cash Flow
Project U
Project V
Year 0
-$2,100,000
-$2,600,000
Year 1
$525,000
$1,300,000
Year 2
$525,000
$1,050,000
Year 3
$525,000
$800,000
Year 4
$525,000
$550,000
Year 5
$525,000
$300,000
Discount rate
5%
11%
Explanation / Answer
project U
PV of cash flows = 525000/1.05 + 525000/1.05^2 + 525000/1.05^3 + 525000/1.05^4 + 525000/1.05^5 = $2,272,975.25
PI = PV/intial investment = $2,272,975.25 / 2100000 = 1.082
PROJECT V
Pv of cash flows = 1300000/1.11 + 1050000/1.11^2 + 800000/1.11^3 + 550000/1.11^4 + 300000/1.11^5
=3148665.26532
PI = 3148665.26532 / 2600000 = 1.211
since PI of project V is greater than project U
we choose project V
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.