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 |
Project Y (Slow-Motion |
|||||||||
| 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
jeff jeffy answered 1 year agoRelated Solutions
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