The Matterhorn Corporation is trying to choose between the following two mutuall
ID: 2759090 • Letter: T
Question
The Matterhorn Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (I) Cash Flow (II) 0 –$89,000 –$57,000 1 38,900 11,100 2 49,000 36,500 3 29,000 30,500 Requirement 1: (a) If the required return is 12 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).) Profitability index Project I Project II (b) If the required return is 12 percent and the company applies the profitability index decision rule, which project should the firm accept? Requirement 2: (a) If the required return is 12 percent, what is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) Net present value Project I $ Project II $ (b) If the company applies the NPV decision rule, which project should it take?
Explanation / Answer
Solution ~:
NPV
Year
Cash Flow (I)
Cash Flow (II)
Discount factor @12%
PV (I)
PV (II)
0
-89000
-57000
1
-89,000.00
- 57,000.00
1
38900
11100
0.892857143
34,732.14
9,910.71
2
49000
36500
0.797193878
39,062.50
29,097.58
3
29000
30500
0.711780248
20,641.63
21,709.30
NPV
5,436.27
3,717.59
Project I should be selected as it has higher NPV.
profitability index = (NPV+INTIAL INVESTMENT)/INITIAL INVESTMENT
Project I (5436.27+89000)/89000
1.06
Project II(3717.59+57000)/57000
1.07
Project I should be selected as it has Profitability index.
NPV
Year
Cash Flow (I)
Cash Flow (II)
Discount factor @12%
PV (I)
PV (II)
0
-89000
-57000
1
-89,000.00
- 57,000.00
1
38900
11100
0.892857143
34,732.14
9,910.71
2
49000
36500
0.797193878
39,062.50
29,097.58
3
29000
30500
0.711780248
20,641.63
21,709.30
NPV
5,436.27
3,717.59
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