The Sloan Corporation is trying to choose between the following two mutually exc
ID: 2767516 • Letter: T
Question
The Sloan Corporation is trying to choose between the following two mutually exclusive design projects:
If the required return is 12 percent, what is the profitability index for both projects? (Do not round intermediate calculations. Round your answers to 3 decimal places, e.g., 32.161.)
If the company applies the profitability index decision rule, which project should the firm accept?
What is the NPV for both projects? (Negative amounts should be indicated by a minus sign. 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?
Year Cash Flow(I) Cash Flow
(II) 0 –$ 65,000 –$ 17,900 1 30,000 9,650 2 30,000 9,650 3 30,000 9,650
Explanation / Answer
Cash Flow (i)
Year
CashFlow
PV Factor@ 12%
PV
0
(65,000)
1.0000
(65,000.00)
1
30,000
0.8929
26,785.71
2
30,000
0.7972
23,915.82
3
30,000
0.7118
21,353.41
NPV
7,054.94
PI= NPV + Initial Investment/ Initial Investment= $7,054.94+65,000/65,000=1.11
Cash Flow (ii)
Year
CashFlow
PV Factor@ 12%
PV
0
(17,900)
1.0000
(17,900.00)
1
9,650
0.8929
8,616.07
2
9,650
0.7972
7,692.92
3
9,650
0.7118
6,868.68
NPV
5,277.67
PI= NPV + Initial Investment/ Initial Investment= $5,277.67+17,900/17,900=1.29
a-1If the required return is 12 percent, what is the profitability index for both projects
Profitability
Index
Project I-1.11
Project II--1.29
a-2) If the company applies the profitability index decision rule, which project should the firm accept?
Project II
b-1) What is the NPV for both projects?
Profitability
Index
Project I-$7,054.94
Project II--$5,277.67
b-2) If the company applies the NPV decision rule, which project should it take?
Project I
Cash Flow (i)
Year
CashFlow
PV Factor@ 12%
PV
0
(65,000)
1.0000
(65,000.00)
1
30,000
0.8929
26,785.71
2
30,000
0.7972
23,915.82
3
30,000
0.7118
21,353.41
NPV
7,054.94
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