Question

Using the following table calculate the following:

a. PV

b. NPV

c. PI

Which investment is the best if you have unlimited capital? (Why)

Which investment is the best if you have limited capital? (Why

Profitability Index (PI)
3 Investment alternatives
	System A	System B	System C
Initial Cost	$       100,000	$       165,000	$         50,000
CF Year 1	$         40,000	$         60,000	$         10,000
CF Year 2	$         40,000	$         60,000	$         12,000
CF Year 3	$         40,000	$         60,000	$         20,000
CF Year 4	$         40,000	$         70,000	$         40,000
r	10%	10%	10%

Answer 1

		System A	Discount factor @10%	Present value	System B	Discount factor @10%	Present value	System C	Discount factor @10%	Present value
	CF Year 1	$      40,000	$    0.90909	$      36,364	$      60,000	$         0.90909	$           54,545	$           10,000	$         0.90909	$      9,091
	CF Year 2	$      40,000	$    0.82645	$      33,058	$      60,000	$         0.82645	$           49,587	$           12,000	$         0.82645	$      9,917
	CF Year 3	$      40,000	$    0.75131	$      30,053	$      60,000	$         0.75131	$           45,079	$           20,000	$         0.75131	$     15,026
	CF Year 4	$      40,000	$    0.68301	$      27,321	$      70,000	$         0.68301	$           47,811	$           40,000	$         0.68301	$     27,321
a)	Present value			$     126,795			$         197,022			$     61,355
	Initial Cost	$     100,000	1	$     100,000	$     165,000	1	$         165,000	$           50,000	1	$     50,000
b)	Net present value			$         26,795			$               32,022			$       11,355
c)	Profitability index			1.27			1.19			1.23
	Profitability Index= Present value of cash inflows/cash outflow
All the investments are good with unlimited capital as all of them have positive net present value.
With limited capital, the investments need to be made in the following order 1) system B 2) system A and 3) system C i.e. highest net present value project should taken up first.