You are a financial analyst for the Brittle Company. The director of capital bud
ID: 2807846 • Letter: Y
Question
You are a financial analyst for the Brittle Company. The director of capital budgeting has asked you to analyze two proposed capital investments: Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%. The projects' expected net cash flows are shown in the table below.
Expected Net Cash Flows
Year
Project X
Project Y
0
– $10,000
– $10,000
1
6,500
3,500
2
3,000
3,500
3
3,000
3,500
4
1,000
3,500
Use the Homework Student Workbook to calculate each project's net present value (NPV), internal rate of return (IRR), modified internal rate of return (MIRR), and profitability index (PI).
Which project or projects should be accepted if they are independent?
Which project or projects should be accepted if they are mutually exclusive?
Year
Project X
Project Y
0
– $10,000
– $10,000
1
6,500
3,500
2
3,000
3,500
3
3,000
3,500
4
1,000
3,500
Explanation / Answer
Profitability Index (PI) = Present value of Cash Inflows / Initial Investment
Profitability Index
Project X = $10966.0118828 / $10000 = 1.09660118828 or 1.097
Project Y = $10630.722713 / $10000 = 1.0630722713 or 1.063
Present value of Cash Inflows Particulars Year PVF@12% Amount Present Value Project X 1 0.89285714285 $6500 $5803.57142852 2 0.79719387754 $3000 $2391.58163262 3 0.7117802478 $3000 $2135.3407434 4 0.63551807839 $1000 $635.51807839 Total $10966.0118828 Project Y 1 - 4 3.03734934658 (add above values) $3500 $10630.722713Related Questions
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