Question

magine that your company is facing with a set of capital budgeting investment opportunities. The data table below shows the net investment and the net cash flows of the different but same scale capital budgeting projects:

Year	Project #1	Project #2
0	-$4,500	-$22,000
1	$5,700	$25,800

Based on the financial data presented in the table above, which one of the projects looks like a better investment with NPV and PI decision rationale (use 10.00% as the minimum required rate of return)?

Group of answer choices

Neither one of the projects

Project #2

Both Project #1 and #2

Project #1

Answer 1

Project 1

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$4,500. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the minimum required rate of return of 10%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 10% minimum required rate of return is $681.82.

Project 2

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$22,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the minimum required rate of return of 10%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 10% minimum required rate of return is $1,454.55.

Project 1

Profitability index is calculated using the below formula:

Profitability Index= NPV + Initial investment/ Initial investment

= $681.82 +$4,500/ $4,500

= $5,181.82/  $4,500

= 1.15.

Project 2

Profitability index is calculated using the below formula:

Profitability Index= NPV + Initial investment/ Initial investment

= $1,454.55 +$22,000/ $22,000

= $23,454.55/ $22,000

= 1.07.

Project 2 looks like the better investment since it has the highest net present value.

Hence, the answer is option b.