Question

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The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B,...

The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows:

  

Year Project A Project B Project C
0 −$ 205,000 −$ 370,000 −$ 205,000
1 132,000 228,000 142,000
2 132,000 228,000 112,000

  

Suppose the relevant discount rate is 7 percent per year.

  

a.

Compute the profitability index for each of the three projects. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)


   


b.

Compute the NPV for each of the three projects. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)


   

Solutions

Expert Solution

a. profitability index = present value of cash inflow / cash outflow

present value of cash flow

year PV FACTOR AT 7% PRESENT VALUE Project A B C
1 [1/1.07]1 0.9345794 123364.4808[0.9345794*132000] 213084.1032[0.9345794*228000] 132710.2748[0.9345794*142000]
2 [1/1.07]2 0.8734387 115293.9084[0.8734387*132000] 199144.0236[0.8734387*228000] 97825.1344[0.8734387*112000]
TOTAL PRESENT VALUE 238658.398112 412228.1268 230535.4092

PROFITABILITY INDEX

A B C
PRESENT VALUE 238658.398112 412228.1268 230535.4092
CASH OUTFLOW 205000 370000 205000
PRESENT VALUE OF CASH INFLOW/ CASH OUTFLOW 1.16 1.11 1.12

B.NPV = PRESENT VALUE OF CASH INFLOW - CASH OUTFLOW

A B C
PRESENT VALUE 238658.398112 412228.1268 230535.4092
CASH OUTFLOW 205000 370000 205000
NET PRESENT VALUE $33658.40[238658.40-205000] $42228.13[412228.13-370000] $25535.41[230535.41-205000]

ekkarill92 answered 6 months ago
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