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 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?

Solutions

Expert Solution

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

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