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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 $ (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?

Solutions

Expert Solution

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.


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