In: Accounting
Following is information on two alternative investments being considered by Tiger Co. The company requires a 4% 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 X1 | Project X2 | |||||||||
Initial investment | $ | (130,000 | ) | $ | (220,000 | ) | ||||
Expected net cash flows in year: | ||||||||||
1 | 50,000 | 97,500 | ||||||||
2 | 60,500 | 87,500 | ||||||||
3 | 85,500 | 77,500 | ||||||||
a. Compute each project’s net present value.
b. Compute each project’s profitability index. If
the company can choose only one project, which should it
choose?
Answer to Part 2.
Project X1:
Profitability Index= PV of Cash Inflow / Initial Investment
Profitability Index= $180,022.80 / $130,000.00
Profitability Index= 1.38
Project X2:
Profitability Index= PV of Cash Inflow / Initial Investment
Profitability Index= $243,546.25 / $220,000.00
Profitability Index= 1.11