You are analyzing two proposed capital investments with the following cash flows

Question

You are analyzing two proposed capital investments with the following cash flows:

The cost of capital for both projects is 10 percent.

a. 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.)
The PI for project X is __________ and the PI for project Y is _________.

b. Which project, or projects, should be accepted if you have unlimited funds to invest? (Project X, neither, project y, both?)

c. Which project should be accepted if they are mutually exclusive? (project x, neither, project y?)

Year Project X Project Y 0 - $20,000 - $20,000 1 12,730 6,670 2 5,660 6,670 3 6,260 6,670 4 1,820 6,670

Explanation / Answer

A- Profitability Index= PV of Cash flow/Initial Outflow

Project X= $22196.73/$20000= 1.11

Project Y = $21143/20000= 1.06

B- Both the project have PI more than 1 hence NPV of both project is positive. As if we have unlimited fund the we should accept Both X AND Y.

C- iF Project is mutually exclusive the we should accept project x as it has PI(1.11) more than project Y(1.06)

Cashflow Year Project X Project Y PVF@10% CF(X)*PVF CF(Y)*PVF 1 $12,730.00 $6,670.00 0.9090909 $11,572.73 $6,063.64 2 $5,660.00 $6,670.00 0.8264463 $4,677.69 $5,512.40 3 $6,260.00 $6,670.00 0.7513148 $4,703.23 $5,011.27 4 $1,820.00 $6,670.00 0.6830135 $1,243.08 $4,555.70 Present Value $22,196.73 $21,143.00

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