9 - 10.43 You are analyzing two proposed capital investments with the following

Question

9 - 10.43

You are analyzing two proposed capital investments with the following cash flows: The cost of capital for both projects is 10 percent. Calculate the profitability index (PI) for each project. (Do not round discount factors. Round intermediate calculations to 2 decimal places, e.g. 15.25 and final answer to 4 decimal places, e.g. 1.2527.) Which project, or projects, should be accepted if you have unlimited funds to invest? Which project should be accepted if they are mutually exclusive?

Explanation / Answer

Answer to the Question

Point No.1

PI of Project X=PV of future cash flow/Initial investment

=$22,639.25/20,000

=1.13

PI of project Y=PV of future cash flow/Initial Investment

=$22,410.95/20,000

=1.12

PI of projet X is 1.13 and PI of project Y is 1.12.

Point No.2

If I have un limited fund .I can invest in both the project because both gives poaitive NPV.

Point no.3

Project X should be selected if both the project are mutually exclusive because NPV and PI of project X is more than Project Y.

PROJECT -X Year Free Cash Flow PVF @ 10% Present Value of Future Free Cash Flow 0               (20,000)                   1.000                        (20,000.00) 1                13,630                   0.909                         12,390.91 2                  5,660                   0.826                          4,677.69 3                  5,760                   0.751                          4,327.57 4                  1,820                   0.683                          1,243.08 NPV                          2,639.25

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