Question

Following is information on two alternative investments being considered by Jolee Company. The company requires a 10% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

	Project A					Project B
Initial investment		$	(184,325	)			$	(156,960	)
Expected net cash flows in year:
1			54,000					31,000
2			49,000					54,000
3			85,295					51,000
4			81,400					70,000
5			54,000					29,000

a. For each alternative project compute the net present value.
b. For each alternative project compute the profitability index. If the company can only select one project, which should it choose?

Answer 1

1
Project A
Initial investment	184325
Chart values are based on:
i=	10%
Year	Cash inflow	PV factor	Present value
1	54000	0.9091	49091
2	49000	0.8264	40494
3	85295	0.7513	64082
4	81400	0.6830	55596
5	54000	0.6209	33529
			242792
Present value of cash inflows			242792
Present value of cash outflows			184325
Net present value			58467
Project B
Initial investment	156960
Chart values are based on:
i=	10%
Year	Cash inflow	PV factor	Present value
1	31000	0.9091	28182
2	54000	0.8264	44626
3	51000	0.7513	38316
4	70000	0.6830	47810
5	29000	0.6209	18006
			176940
Present value of cash inflows			176940
Present value of cash outflows			156960
Net present value			19980
b
Present value of net cash flows / Initial investment = Profitability index
Project A = 242792/184325= 1.3172
Project B = 176940/156960= 1.1273
Project A should be selected