The Matterhorn Corporation is trying to choose between the following two mutuall
ID: 2733313 • Letter: T
Question
The Matterhorn Corporation is trying to choose between the following two mutually exclusive design projects:
a. If the required return is 14 percent, what is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)
If the required return is 14 percent and the company applies the profitability index decision rule, which project should the firm accept?
b. If the required return is 14 percent, what is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
If the company applies the NPV decision rule, which project should it take?
Explanation / Answer
Statement showing Cash flows PROJECT 1 PROJECT 2 Particulars Time PVf@14% Amount PV Amount PV Cash Outflows - 1.00 (81,000.00) (81,000.00) (39,000.00) (39,000.00) PV of Cash outflows = PVCO (81,000.00) (39,000.00) Cash inflows 1.00 0.8772 31,500.00 27,631.58 13,500.00 11,842.11 Cash inflows 2.00 0.7695 41,000.00 31,548.17 28,500.00 21,929.82 Cash inflows 3.00 0.6750 47,000.00 31,723.66 22,500.00 15,186.86 PV of Cash Inflows =PVCI 90,903.41 48,958.79 PI = PVCI/PVCO 1.12 1.26 Undertake Project 2 b) NPV= PVCI - PVCO 9,903.41 9,958.79 Undertake Project 2
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