Question

Carmen, Inc., which has a hurdle rate of 10%, is considering three different independent investment opportunities. Each project has a five-year life. The annual cash flows and initial investment for each of the projects are as follows: (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables.)

	Project A			Project B			Project C
Annual cash flows	$	105,651		$	56,875		$	103,261
Initial investment		178,000			107,800			168,000

a. What is the present value of the annual cash flows for each of the three projects? (Round your answers to the nearest dollar amount.)

b. What is the net present value of each of the projects? (Round your intermediate calculations and final answers to the nearest dollar amount.)

c. What is the profitability index of each of the projects? (Round the intermediate calculation to the nearest dollar amount. Round your answers to 2 decimal places.)

d. In what order should Carmen prioritize investment in the projects?

• C, B, A

• A, C, B

• C, A, B

Answer 1

		Project A	Project B	Project C
	Annual cash flow	105,651	56,875	103,261
	Initial investment	178,000	107,800	168,000
ans a)	present value of the annual cash flows
	Put in calculator for each case
		Project A	Project B	Project C
	PMT	105,651	56,875	103,261
	N	5	5	5
	I	10%	10%	10%
	FV	0	0	0
	Compute PV	($400,500)	($215,601)	($391,440)
	PV=	$400,500	$215,601	$391,440
ans b)	NPV	Project A	Project B	Project C
	PV of cash flow	$400,500	$215,601	$391,440
Less	Initial investment	178000	107800	168000
	NPV =	$222,500	$107,801	$223,440
ans c)	profitability index
	PV	Project A	Project B	Project C
i	PV of cash flow	400500	215601	391440
ii	Initial investment	178000	107800	168000
iii	PI = i/ii	2.25	2.00	2.33
ans d)	Rank
	C, A, B