Question

The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of projects A, B, and C as follows: Year Project A Project B Project C 0 ? $ 180,000 ? $ 330,000 ? $ 180,000 1 116,000 212,000 126,000 2 116,000 212,000 96,000 Suppose the relevant discount rate is 9 percent per year.

a. Compute the profitability index for each of the three projects. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.) Profitability index Project A Project B . Project C

b. Compute the NPV for each of the three projects. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.) NPV Project A $ Project B $ Project C $

c. Suppose these three projects are independent. Which project(s) should Amaro accept based on the profitability index rule? Project A Project B Project C Project A, Project B, Project C Project A, Project B Project A, Project C Project B, Project C

d. Suppose these three projects are mutually exclusive. Which project(s) should Amaro accept based on the profitability index rule? Project A Project B Project C Project A, Project B, Project C Project A, Project B Project A, Project C Project B, Project C

e. Suppose Amaro’s budget for these projects is $510,000. The projects are not divisible. Which project(s) should Amaro accept? Project A Project B Project C Project A, Project B, Project C Project B, Project C Project B, Project A Project A, Project C

Answer 1

Year	Project A	Project B	Project C	PV factor @ 9%	PV-A	PV-B	PV-C
0	(180,000)	(330,000)	(180,000)	1.000	(180,000)	(330,000)	(180,000)
1	116,000	212,000	126,000	0.917	106,422	194,495	115,596
2	116,000	212,000	96,000	0.842	97,635	178,436	80,801
				NPV	24,057	42,932	16,398
				PV of inflow	204,057	372,932	196,398
				PV of outflow	180,000	330,000	180,000
				PI	1.134	1.130	1.091
If projects are independent then all projects can be accepted as PI is more than 1 for each case.
If projects are Mutually exclusive, then Project A should be accepted as this project gives highest PI.
If total budget is 510000, the Project A and B should be accepted
		Cost-combined	Inflow-PV
option A	A & B	510,000	576,988
option B	A & C	360,000	400,455
option C	B & C	510,000	569,329
As we can see for option B, the funds are lying idle.
Option C is utilizing full but giving less return as compated to option A
So apt combination will be project A & B