Question

In: Finance

You are asked to evaluate the following two projects for Boring Corporation. Use a discount rate...

You are asked to evaluate the following two projects for Boring Corporation. Use a discount rate of 13 percent. Use Appendix B.

Project X (DVDs
of the Weather Reports)
($18,000 Investment)

Project Y (Slow-Motion
Replays of Commercials)
($38,000 Investment)

Year    Cash Flow Year Cash Flow
1 $9,000 1 $19,000
2 7,000 2 12,000
3 8,000 3 13,000
4 7,600 4 15,000

a. Calculate the profitability index for project X. (Round "PV Factor" to 3 decimal places. Round the final answer to 2 decimal places.)

PI             

b. Calculate the profitability index for project Y. (Round "PV Factor" to 3 decimal places. Round the final answer to 2 decimal places.)

PI             

c. Using the NPV method combined with the PI approach, which project would you select? Use a discount rate of 13 percent.

  • Project Y

  • Project X

Solutions

Expert Solution

NPV = PV of Cash Inflwos - PV of Cash outflows

PI = PV of Cash inflwos / PV of Cash Outflows

PI Project X:

Year CF PVF @13% Disc CF
1 $9,000.00     0.8850 $   7,964.60
2 $7,000.00     0.7831 $   5,482.03
3 $8,000.00     0.6931 $   5,544.40
4 $7,600.00     0.6133 $   4,661.22
PV of Cash Inflows $23,652.25
PV of Cash Outflows $18,000.00
PI              1.31

PI Project Y:

Year CF PVF @13% Disc CF
1 $19,000.00     0.8850 $16,814.16
2 $12,000.00     0.7831 $   9,397.76
3 $13,000.00     0.6931 $   9,009.65
4 $15,000.00     0.6133 $   9,199.78
PV of Cash Inflows $44,421.35
PV of Cash Outflows $38,000.00
PI              1.17

NPV :

Project X:

Year CF PVF @13% Disc CF
1 $9,000.00     0.8850 $   7,964.60
2 $7,000.00     0.7831 $   5,482.03
3 $8,000.00     0.6931 $   5,544.40
4 $7,600.00     0.6133 $   4,661.22
PV of Cash Inflows $23,652.25
PV of Cash Outflows $18,000.00
NPV       5,652.25

Project Y:

Year CF PVF @13% Disc CF
1 $19,000.00     0.8850 $16,814.16
2 $12,000.00     0.7831 $   9,397.76
3 $13,000.00     0.6931 $   9,009.65
4 $15,000.00     0.6133 $   9,199.78
PV of Cash Inflows $44,421.35
PV of Cash Outflows $38,000.00
NPV       6,421.35
Particular Project X Project Y Selected
PI 1.31 1.17 Project X
NPV $5,652.25 $   6,421.35 Project Y

Plz comment, if any further assistance is required


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