Dahlia Manufacturing has the following two possible projects. The required retur

Question

Dahlia Manufacturing has the following two possible projects. The required return is 10 percent. Year Project Y Project Z 0 –$27,400 –$54,000 1 13,400 20,000 2 11,800 25,000 3 14,200 18,000 4 9,800 23,000 Required: (a) 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 Y Project Z (b) What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) NPV Project Y $ Project Z $

Explanation / Answer

Calculation of NPV Year Project Y Discount Rate Project Z Cash Outflows 0 -27400 1 -27400 -27400 -54000 -54000 -54000 Cash Inflows 1 13400 0.909091 12181.82 20000 18181.82 2 11800 0.826446 9752.066 25000 20661.16 3 14200 0.751315 10668.67 18000 13523.67 4 9800 0.683013 6693.532 39296.09 23000 15709.31 68075.95 Net Present Value 11896.09 14075.95 Profitabilty Index = Cash Inflows/ Cash Outflows Project Y Project Z = 39296/27400 = 68076/54000 1.434161 = 1.260667

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