Question

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		$	(189,325	)			$	(159,960	)
Expected net cash flows in:
Year 1			49,000					42,000
Year 2			41,000					51,000
Year 3			87,295					66,000
Year 4			81,400					77,000
Year 5			60,000					23,000

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?

For each alternative project compute the net present value.

	Project A Initial Investment $189,325 Chart Values are Based on: i = % Year Cash Inflow x PV Factor = Present Value 1 = 2 = 3 = 4 = 5 = Project B Initial Investment $159,960 Year Cash Inflow x PV Factor = Present Value 1 = 2 = 3 = 4 = 5 =

	Profitability Index Choose Numerator: / Choose Denominator: = Profitability Index / = Profitability index Project A 0 Project B 0 If the company can only select one project, which should it choose?

Answer 1

Solution a:

Project A
Initial investment		$189,325.00
Chart values are based on:
i=	8%
Year	Cash inflows	*	PV Factor	=	Present Value
1	$49,000.00	*	0.92593	=	$45,370
2	$41,000.00	*	0.85734	=	$35,151
3	$87,295.00	*	0.79383	=	$69,298
4	$81,400.00	*	0.73503	=	$59,831
5	$60,000.00	*	0.68058	=	$40,835
	Total				$250,485
Present value of cash inflows	$250,485
Initial investment	$189,325
Net Present Value	$61,160

Project B
Initial investment		$159,960.00
Chart values are based on:
i=	8%
Year	Cash inflows	*	PV Factor	=	Present Value
1	$42,000.00	*	0.92593	=	$38,889
2	$51,000.00	*	0.85734	=	$43,724
3	$66,000.00	*	0.79383	=	$52,393
4	$77,000.00	*	0.73503	=	$56,597
5	$23,000.00	*	0.68058	=	$15,653
	Total				$207,257
Present value of cash inflows	$207,257
Initial investment	$159,960
Net Present Value	$47,297

Solution b:
Profitability Index
	Choose Numerator	/	Choose Denominator	=	Profitability Index
	NPV	/	Initial investment	=	Profitability Index
Project A	$61,160	/	$189,325	=	0.32
Project B	$47,297	/	$159,960	=	0.30
If the company can select one project, which should it choose?		Project A