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		$	(188,325	)			$	(154,960	)
Expected net cash flows in:
Year 1			50,000					33,000
Year 2			41,000					48,000
Year 3			80,295					57,000
Year 4			87,400					68,000
Year 5			64,000					34,000

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

Answer-a)-

Calculation of Investment's Net Present Value
Project A
	Net Cash Flows $ (a)	Present Value of 1 at 6% (b)	Present Value of cash flows (c=a*b) $
Year 1	50000	0.9434	47170
Year 2	41000	0.8900	36490
Year 3	80295	0.8396	67416
Year 4	87400	0.7921	69230
Year 5	64000	0.7473	47827
Totals
Total present value of cash inflow (a)			268132
Total cash outflow (b)			188325
Net Present Value $ (c=a-b)			79807
Calculation of Investment's Net Present Value
Project B
	Net Cash Flows $ (a)	Present Value of 1 at 6% (b)	Present Value of cash flows (c=a*b) $
Year 1	33000	0.9434	31132
Year 2	48000	0.8900	42720
Year 3	57000	0.8396	47857
Year 4	68000	0.7921	53863
Year 5	34000	0.7473	25408
Totals
Total present value of cash inflow (a)			200980
Total cash outflow (b)			154960
Net Present Value $ (c=a-b)			46020

b)-

Project Profitability Index
Project	A	B
Profitability Index	1.42	1.30

Explanation-

Calculation of Project Profitability Index
Particulars	Project Number
	A	B
Present Value of cash inflows $ (A)	268132	200980
Investment required $ (B)	188325	154960
Profitability Index C=A/B	1.42	1.30

If the company can only select one project,project A should choose.