Question

Following is information on two alternative investments being considered by Tiger Co. The company requires an 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 X1					Project X2
Initial investment		$	(128,000	)			$	(216,000	)
Expected net cash flows in:
Year 1			49,000					96,000
Year 2			59,500					86,000
Year 3			84,500					76,000

a. Compute each project’s net present value.
b. Compute each project’s profitability index. If the company can choose only one project, which should it choose?

Answer 1

	Net cash flows	Present value of $1 at 8%	Present value of net cash flows
Project X1
Year 1	49,000	0.9259	45,369
Year 2	59,500	0.8573	51,009
Year 3	84,500	0.7938	67,076
Total	1,93,000		1,63,455
Amount Invested			-1,28,000
Net Present value			35,455
Project X2
Year 1	96,000	0.9259	88,886
Year 2	86,000	0.8573	73,728
Year 3	76,000	0.7938	60,329
Total	2,58,000		2,22,943
Amount Invested			-2,16,000
Net Present value			6,943

Profitability Index
	Choose Numerator	/	Choose Denominator	=	Profitability Index
	PV of future Cash flows	/	Initial Investment	=	Profitability Index
Project X1	1,63,455	/	1,28,000	=	1.28
Project X2	2,22,943	/	2,16,000	=	1.03
If the company can choose only one project, which should it choose?				Project X1