Question

In: Accounting

Following is information on two alternative investments being considered by Jolee Company. The company requires a...

Following is information on two alternative investments being considered by Jolee Company. The company requires a 8% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)
  

Project A Project B
Initial investment $ (184,325 ) $ (154,960 )
Expected net cash flows in year:
1 50,000 29,000
2 60,000 55,000
3 75,295 48,000
4 78,400 83,000
5 71,000 22,000


a. For each alternative project compute the net present value.
b. For each alternative project compute the profitability index. If the company can only select one project, which should it choose?

Project A
Initial Investment $184,325
Chart Values are Based on:
i =not attempted not attempted
Year Cash Inflow x PV Factor = Present Value
1 not attempted not attempted = not attempted
2 not attempted not attempted = not attempted
3 not attempted not attempted =
4 not attempted not attempted =
5 not attempted not attempted =
Present value of cash inflowsselected answer correct
Present value of cash outflowsselected answer correct
Net present valueselected answer correct not attempted
Project B
Initial Investment $154,960
Year Cash Inflow x PV Factor = Present Value
1 not attempted not attempted = not attempted
2 not attempted =
3 not attempted =
4 not attempted =
5 not attempted =
Present value of cash inflowsselected answer correct
Present value of cash outflowsselected answer correct
Net present valueselected answer correct not attempted

Solutions

Expert Solution

Answer =1
CACULATION OF PRESTN VALUE OF THE PROJECT A
Period Particulars Amount PVF @ 8% Present Value
0 Outflow $     -1,84,325.00 $                       1.000 $         -1,84,325.00
1 Inflow $          50,000.00 $                       0.926 $               46,296.30
2 Inflow $          60,000.00 $                       0.857 $               51,440.33
3 Inflow $          75,295.00 $                       0.794 $               59,771.60
4 Inflow $          78,400.00 $                       0.735 $               57,626.34
5 Inflow $          71,000.00 $                       0.681 $               48,321.41
Total $               79,130.97
CACULATION OF PROFITABILITY INDEX OF PROJECT A
Profitability Index = 1 + Net present Value / Initial investment
Profitability Index =          1 + $          79,130.97 "/" By $           1,84,325.00
Profitability Index =          1 + $                     0.43
Profitability Index =          1.43
Answer =2
CACULATION OF PRESTN VALUE OF THE PROJECT B
Period Particulars Amount PVF @ 8% Present Value
0 Outflow $     -1,54,960.00 $                       1.000 $         -1,54,960.00
1 Inflow $          29,000.00 $                       0.926 $               26,851.85
2 Inflow $          55,000.00 $                       0.857 $               47,153.64
3 Inflow $          48,000.00 $                       0.794 $               38,103.95
4 Inflow $          83,000.00 $                       0.735 $               61,007.48
5 Inflow $          22,000.00 $                       0.681 $               14,972.83
Total $               33,129.74
CACULATION OF PROFITABILITY INDEX OF PROJECT B
Profitability Index = 1 + Net present Value / Initial investment
Profitability Index =          1 + $          33,129.74 "/" By $           1,54,960.00
Profitability Index =          1 + $                     0.21
Profitability Index =          1.21
Note: If we have to select any one of the project from the Project A & prject B then we
can select the onlu Project A because the NPV and Profitability index of the Project A
is greater than Project B.
Decision: Select the Project A

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