Question

Following is information on two alternative investments being considered by Jolee Company. The company requires a 10% 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		$	(175,325	)			$	(142,960	)
Expected net cash flows in:
Year 1			40,000					33,000
Year 2			44,000					43,000
Year 3			91,295					57,000
Year 4			88,400					78,000
Year 5			64,000					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?

Answer 1

Answer-a)-

Calculation of Net Present Value
PROJECT A
Year	Net Cash Flows (a)	Present Value of 1 at 10% (b)	Present Value of cash flows (c=a*b)
Year 1	40000	0.909	36360
Year 2	44000	0.826	36344
Year 3	91295	0.751	68563
Year 4	88400	0.683	60377
Year 5	64000	0.621	39744
Totals
Total present value of cash inflow (a)			241388
Total cash outflow (b)			175325
Net Present Value (c=a-b)			66063
Calculation of Net Present Value
PROJECT B
Year	Net Cash Flows (a)	Present Value of 1 at 10% (b)	Present Value of cash flows (c=a*b)
Year 1	33000	0.909	29997
Year 2	43000	0.826	35518
Year 3	57000	0.751	42807
Year 4	78000	0.683	53274
Year 5	36000	0.621	22356
Totals
Total present value of cash inflow (a)			183952
Total cash outflow (b)			142960
Net Present Value (c=a-b)			40992

b)-

Calulation of Profitablity Index
Particulars	Project
	A	B
Present Value net cash inflows $ (A)	241388	183952
Investment required $ (B)	175325	142960
Profitablity Index C=A/B	1.38	1.29

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