Question

8.

Following is information on two alternative investments being considered by Jolee Company. The company requires a 12% 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		$	(182,325	)			$	(146,960	)
Expected net cash flows in:
Year 1			38,000					27,000
Year 2			46,000					45,000
Year 3			75,295					50,000
Year 4			89,400					78,000
Year 5			58,000					36,000

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 $182,325 Chart Values are Based on: i = % Year Cash Inflow x PV Factor = Present Value 1 = 2 = 3 = 4 = 5 = Project B Initial Investment $146,960 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

PART-A: CALCULATION OF NET PRESENT VALUE:

Net Present Value = Discounted cash inflow - Discounted cash outflow

PROJECT- A:

YEAR	CASH FLOW $	PRESENT VALUE FACTOR @ 12%	DISCOUNTED CASH FLOW $
1	38000	0.8929	33930.20
2	46000	0.7972	36671.20
3	75295	0.7118	53594.98
4	89400	0.6355	56813.70
5	58000	0.5674	32909.20
0	(182325)	1	(182325.00)
		NET PRESENT VALUE	31594.28

PROJECT- B:

YEAR	CASH FLOW $	PRESENT VALUE FACTOR @12%	DISCOUNTED CASH FLOW $
1	27000	0.8929	24108.30
2	45000	0.7972	35874
3	50000	0.7118	35590
4	78000	0.6355	49569
5	36000	0.5674	20426.40
0	(146960)	1	(146960.00)
		NET PRESENT VALUE	18607.70

PART-B: CALCULATION OF PROFITABILITY INDEX:

Profitability Index = Discounted cash inflow / Discounted cash outflow

PROJECT - A:

Discounted cash inflow

($38000 * 0.8929)+($46000 * 0.7972)+($75295 * 0.7118)+($89400 * 0.6355)+($58000 * 0.5674)

= $213919.28

Profitability index = $213919.28 / $182325.00 = 1.1733

PROJECT - B:

Discounted cash inflow

($27000 * 0.8929)+($45000 * 0.7972)+($50000 * 0.7118)+($78000 * 0.6355)+($36000 * 0.5674)

= $165567.70

Profitability index = $165567.70 / $146969.00 = 1.1266

PART-C: DECISION:

PROJECT	NPV	PI
A	31594.28	1.1733
B	18607.70	1.1266

By analyzing above NPV and PI of both the project, Jolee Company should choose Project A.

Because, the project A has higher NPV and PV than the project B.