The Matterhorn Corporation is trying to choose between the following two mutuall
ID: 2719633 • Letter: T
Question
The Matterhorn Corporation is trying to choose between the following two mutually exclusive design projects:
If the required return is 11 percent, what is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 3 decimal places (e.g., 32.161).)
If the required return is 11 percent and the company applies the profitability index decision rule, which project should the firm accept?
(Click to select)Project IProject II
If the required return is 11 percent, what is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
The Matterhorn Corporation is trying to choose between the following two mutually exclusive design projects:
Explanation / Answer
1.
a. Profitability index = Present Value of Cash Inflows / Present Value of Cash Outflows
Project I = 93591.9 / 88000 = 1.06
Project II = 60661.9 / 56000 = 1.08
b. If the required return is 11 percent and the company applies the profitability index decision rule, then project II will be selected.
2.
NPV = Present value of cash inflows - Present value of cash ouflows
Project I= 93591.9 - 88000 = $5591.9
Project II=60661.9 - 56000 = $4661.9
b. If the company applies the NPV decision rule, project I will be taken.
Year PVF Project I Present Value Project II Present Value 1 0.901 37900 34147.90 11400 10271.4 2 0.812 48000 38976 35500 28826 3 0.731 28000 20468 29500 21564.5 93591.9 60661.9Related Questions
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