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 $ (189,325 ) $ (144,960 ) Expected net cash flows in year: 1 54,000 38,000 2 45,000 59,000 3 90,295 52,000 4 91,400 75,000 5 56,000 32,000 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

a. Net present value

Project A	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Total
Initial Investment	($189,325)						($189,325)
Net cash flow		54,000	45,000	90,295	91,400	56,000	$336,695
Net cash flow	($189,325)	$54,000	$45,000	$90,295	$91,400	$56,000	$147,370
Life 5 years
Required Rate of Return is 10%
Present Value factor	1	0.90909	0.82645	0.75131	0.68301	0.62092
Present Value of Cash outflow	-189,325	49,091	37,190	67,840	62,427	34,772	$61,995
Net Present value	-189,325	49,091	37,190	67,840	62,427	34,772	$61,995
Project B	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Total
Initial Investment	($144,960)						($144,960)
Net cash flow		38,000	59,000	52,000	75,000	32,000	$256,000
Net cash flow	($144,960)	$38,000	$59,000	$52,000	$75,000	$32,000	$111,040
Life 5 years
Required Rate of Return is 10%
Present Value factor	1	0.90909	0.82645	0.75131	0.68301	0.62092
Present Value of Cash outflow	-144,960	34,545	48,760	39,068	51,226	19,869	$48,510
Net Present value	-144,960	34,545	48,760	39,068	51,226	19,869	$48,510

b.  profitability index

	Project A	Project B
Initial investment	189,325	144,960
Net Present value	61,995	48,510
Profitability Index	0.327	0.335

Based on the profitability index company should select Project B.