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Cori's Sausage Corporation is trying to choose between the following two mutually exclusive design projects: Year...

Cori's Sausage Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (I) Cash Flow (II) 0 –$ 62,000 –$ 36,800 1 28,300 16,800 2 28,300 16,800 3 28,300 16,800 a-1. If the required return is 11 percent, what is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.) a-2. If the company applies the profitability index decision rule, which project should the firm accept? Project I Project II b-1. What is the NPV for each project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b-2. If the company applies the NPV decision rule, which project should it take?Project II Project I

Solutions

Expert Solution

First lets put the information in tabular format:

Year Project I Project II
0 -62000 -36800
1 28300 16800
2 28300 16800
3 28300 16800

We first need to calculate the NPV of each project and using that we can find the profitability index

Project I:

Year CF Discount Factor Discounted CF
0 -62000 1/(1+0.11)^0= 1 1*-62000= $          -62,000.00
1 28300 1/(1+0.11)^1= 0.900900901 0.900900900900901*28300= $           25,495.50
2 28300 1/(1+0.11)^2= 0.811622433 0.811622433244055*28300= $           22,968.91
3 28300 1/(1+0.11)^3= 0.731191381 0.73119138130095*28300= $           20,692.72
NPV = Sum of all Discounted CF $              7,157.13
Profitability Index = 1+NPV/Initial investment 1+7157.13/62000 = 1.115

Project I:

Year CF Discount Factor Discounted CF
0 -36800 1/(1+0.11)^0= 1 1*-36800= $          -36,800.00
1 16800 1/(1+0.11)^1= 0.900900901 0.900900900900901*16800= $           15,135.14
2 16800 1/(1+0.11)^2= 0.811622433 0.811622433244055*16800= $           13,635.26
3 16800 1/(1+0.11)^3= 0.731191381 0.73119138130095*16800= $           12,284.02
NPV = Sum of all Discounted CF $             4,254.41
Profitability Index = 1+NPV/Initial investment 1+4254.41/36800 = 1.116

a-1) PI of project I = 1.115 and that of project II = 1.116

a-2) Project II has higher PI so pick that

b-1) NPV of project I = 7,157.13 and that of project II = 4,254.41

b-2) Project I has higher NPV so pick that


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