Question

Following is information on two alternative investments being considered by Jolee Company. The company requires a 6% 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		$	(179,325	)			$	(148,960	)
Expected net cash flows in:
Year 1			41,000					32,000
Year 2			60,000					44,000
Year 3			75,295					59,000
Year 4			88,400					73,000
Year 5			65,000					29,000

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?

Answer 1

			Project A
Initital investment			179,325
Chart values are Based on
i=	6%
Year	Cash	*	PV	=	Present
	inflow		Factor		Value
1	41,000	*	0.9434	=	38679
2	60,000	*	0.89	=	53400
3	75,295	*	0.83962	=	63219
4	88,400	*	0.79209	=	70021
5	65,000	*	0.74726	=	48572
					273891
Present value of cash inflows					273891
present value of cash outflows					179325
Net Present value					94566
			project B
Initital investment			148,960
Chart values are Based on
i=	6%
Year	Cash	*	PV	=	Present
	inflow		Factor		Value
1	32,000	*	0.9434	=	30189
2	44,000	*	0.89	=	39160
3	59,000	*	0.83962	=	49538
4	73,000	*	0.79209	=	57823
5	29,000	*	0.74726	=	21671
					198379
Present value of cash inflows					198379
present value of cash outflows					148960
Net Present value					49419
b)		Profitability Index
	Choose Numerator:				Choose Denominator		=	profitability index
	Present value of net cash flows			/	Initial Investment		=	profitability index
Project A	273891			/	179,325			1.52735
Project B	198379			/	148,960			1.33176
If the company can only select one project , which should it choose?							project A