Project A costs $45,000 with cash inflows of $34,200 in year 1 and $28,700 in ye

Question

Project A costs $45,000 with cash inflows of $34,200 in year 1 and $28,700 in year 2. Project B costs $59,200 with cash inflows of $21,900 in year 1 and $59,200 in year 2. These projects are independent and have an assigned discount rate of 15 percent. Based on the profitability index, what is your recommendation concerning these projects?

Project A costs $45,000 with cash inflows of $34,200 in year 1 and $28,700 in year 2. Project B costs $59,200 with cash inflows of $21,900 in year 1 and $59,200 in year 2. These projects are independent and have an assigned discount rate of 15 percent. Based on the profitability index, what is your recommendation concerning these projects?

Explanation / Answer

Answer:

Profitibility index=PV of cash inflows/PV of cash outflows

Project A= 62900/45000=1.3977

Project B=63805.54/59200=1.077

Accept both the projects.

Project A Project B Particulars Year P.V.F (15%) Cash flow PV ($) Cash flow PV ($) Cost 0 1 -45000 -45000 -59200 -59200 PV of cash outflows -45000 -59200 Cash inflows: 1 0.8695 34200 29736.9 21900 19042.05 2 0.75614 28700 21701.22 59200 44763.49 PV of cash inflows 62900 63805.54

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.