Question

Ink Enterprises provided the below two alternative investments being considered. Ink Enterprises requires a 7% 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 X1 Project X2 Initial investment $ (106,000 ) $ (172,000 ) Expected net cash flows in year: 1 38,000 79,500 2 48,500 69,500 3 73,500 59,500

a. Compute each project’s net present value.Compute each project’s net present value. (Round your final answers to the nearest dollar.)

b. Compute each project’s profitability index. If the company can choose only one project, which should it choose?Compute each project’s profitability index. If the company can choose only one project, which should it choose?

Answer 1

Answer- Net Present value - X1 Project = $31843

X2 Project = 11572

Explanation-

Calculation of Net Present Value (Project X1)
	Net Cash Flows $ (a)	Present Value of 1 at 7% (b)	Present Value of cash flows (c=a*b) $
Year 1	38000	0.9346	35515
Year 2	48500	0.8734	42360
Year 3	73500	0.8163	59998
Totals
Total present value of cash inflow (a)			137873
Total cash outflow (b)	106000	1	106000
Net Present Value $ (c=a-b)			31873
Calculation of Net Present Value (Project X2)
	Net Cash Flows $ (a)	Present Value of 1 at 7% (b)	Present Value of cash flows (c=a*b) $
Year 1	79500	0.9346	74301
Year 2	69500	0.8734	60701
Year 3	59500	0.8163	48570
Totals
Total present value of cash inflow (a)			183572
Total cash outflow (b)	172000	1	172000
Net Present Value $ (c=a-b)			11572

b)-

Calculation of Project Profitability Index
Particulars	Project Number
	X1	X2
Net Present Value $ (A)	31843	11572
Investment required $ (B)	106000	172000
Profitability Index C=A/B	0.30	0.07

If the company can choose only one project, project X1 should be selected by company due to higher net present value & profitability index.