You are asked to evaluate the following two projects for the Norton corporation.
ID: 2768656 • Letter: Y
Question
You are asked to evaluate the following two projects for the Norton corporation. Use a discount rate of 14 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Project X (Videotapes of the Weather Report) ($42,000 Investment) Project Y (Slow-Motion Replays of Commercials) ($62,000 Investment) Year Cash Flow Year Cash Flow 1 $ 21,000 1 $ 31,000 2 19,000 2 24,000 3 20,000 3 25,000 4 19,600 4 27,000
a. Calculate the profitability index for project X. (Do not round intermediate calculations and round your answer to 2 decimal places.) Profitability index
b. Calculate the profitability index for project Y. (Do not round intermediate calculations and round your answer to 2 decimal places.) Profitability index
Explanation / Answer
Project X
year
Cashflow
PV Factor @ 8%
PV
0
(42,000)
1.0000
(42,000.00)
1
21,000
0.8772
18,421.05
2
19,000
0.7695
14,619.88
3
20,000
0.6750
13,499.43
4
19,600
0.5921
11,604.77
NPV
16,145.14
Profitability Index= NPV+ Initial Investment/ Initial investment
=$16,145.14+42,000/42,000
=1.38
Project Y
year
Cashflow
PV Factor @ 8%
PV
0
(62,000)
1.0000
(62,000.00)
1
31,000
0.8772
27,192.98
2
24,000
0.7695
18,467.22
3
25,000
0.6750
16,874.29
4
27,000
0.5921
15,986.17
NPV
16,520.66
Profitability Index= NPV+ Initial Investment/ Initial investment
=$16,520.66+62,000/62,000
=1.27
Project X
year
Cashflow
PV Factor @ 8%
PV
0
(42,000)
1.0000
(42,000.00)
1
21,000
0.8772
18,421.05
2
19,000
0.7695
14,619.88
3
20,000
0.6750
13,499.43
4
19,600
0.5921
11,604.77
NPV
16,145.14
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