Question
In: Finance
You are asked to evaluate the following two projects for Boring Corporation. Use a discount rate...
You are asked to evaluate the following two projects for Boring Corporation. Use a discount rate of 12 percent. Use Appendix B.
|
Project X (DVDs |
Project Y (Slow-Motion |
|||||||||
| Year | Cash Flow | Year | Cash Flow | |||||||
| 1 | $18,000 | 1 | $28,000 | |||||||
| 2 | 16,000 | 2 | 21,000 | |||||||
| 3 | 17,000 | 3 | 22,000 | |||||||
| 4 | 16,600 | 4 | 24,000 | |||||||
a. Calculate the profitability index for project X. (Round "PV Factor" to 3 decimal places. Round the final answer to 2 decimal places.)
PI
b. Calculate the profitability index for project Y. (Round "PV Factor" to 3 decimal places. Round the final answer to 2 decimal places.)
PI
c. Using the NPV method combined with the PI approach, which project would you select? Use a discount rate of 12 percent.
-
Project Y
-
Project X
Solutions
Expert Solution
a.
| Project X | Project Y | |
| NPV | $ 15,487.60 | $ 16,669.00 |
b.
| Project X | Project Y | |
| Profitability Index (PI) | 1.43 | 1.30 |
c.
Project Y
Based on NPV, Project Y is better. But, based on PI, Project X is better.
The objective of investment is to created money.So, NPV method is preferred over others to decide in case of conflict of decison.
Thus, Project Y is better.
| Step-1:Calculation of present value of annual cash flow | ||||
| Project X: | ||||
| Year | Cash Flow | Discount factor | Present Value | |
| a | b | c=1.12^-a | d=b*c | |
| 1 | $ 18,000 | 0.893 | $ 16,074.00 | |
| 2 | $ 16,000 | 0.797 | $ 12,752.00 | |
| 3 | $ 17,000 | 0.712 | $ 12,104.00 | |
| 4 | $ 16,600 | 0.636 | $ 10,557.60 | |
| Total | $ 51,487.60 | |||
| Project Y: | ||||
| Year | Cash Flow | Discount factor | Present Value | |
| a | b | c=1.12^-a | d=b*c | |
| 1 | $ 28,000 | 0.893 | $ 25,004.00 | |
| 2 | $ 21,000 | 0.797 | $ 16,737.00 | |
| 3 | $ 22,000 | 0.712 | $ 15,664.00 | |
| 4 | $ 24,000 | 0.636 | $ 15,264.00 | |
| Total | $ 72,669.00 | |||
| Step-2:Calculation of NPV and PI | ||||
| NPV of: | ||||
| Project X | = | Present Value of annual cash flow | - | Investment |
| = | $ 51,487.60 | - | $ 36,000.00 | |
| = | $ 15,487.60 | |||
| Project Y | = | Present Value of annual cash flow | - | Investment |
| = | $ 72,669.00 | - | $ 56,000.00 | |
| = | $ 16,669.00 | |||
| Profitability Index of : | ||||
| Project X | = | Present Value of annual cash flow | / | Investment |
| = | $ 51,487.60 | / | $ 36,000.00 | |
| = | 1.43 | |||
| Project Y | = | Present Value of annual cash flow | / | Investment |
| = | $ 72,669.00 | / | $ 56,000.00 | |
| = | 1.30 |
jeff jeffy answered 1 year agoRelated Solutions
You are asked to evaluate the following two projects for Boring Corporation. Use a discount rate...
You are asked to evaluate the following two projects for Boring
Corporation. Use a discount rate of 12 percent. Use Appendix B.
Project X (DVDs
of the Weather Reports)
($16,000 Investment)
Project Y (Slow-Motion
Replays of Commercials)
($36,000 Investment)
Year
Cash Flow
Year
Cash Flow
1
$8,000
1
$18,000
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6,000
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of the Weather Reports)
($18,000 Investment)
Project Y (Slow-Motion
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Year
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Year
Cash Flow
1
$9,000
1
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7,000
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12,000
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Project Y (Slow-Motion
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You are asked to evaluate the following two projects for the Norton corporation. Use a discount...
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Norton corporation. Use a discount rate of 12 percent. Use Appendix
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the formula and financial calculator methods.
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Project Y (Slow-Motion
Replays of Commercials)
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($38,000 Investment)
Project Y (Slow-Motion
Replays of Commercials)
($58,000 Investment)
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Cash Flow
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Cash Flow
1
$
19,000
1
$
29,000
2
17,000
2
22,000
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18,000
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23,000
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17,600
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You are asked to evaluate the following two projects for the Norton corporation. Use a discount...
You are asked to evaluate the following two projects for the
Norton corporation. Use a discount rate of 14 percent. Use Appendix
B for an approximate answer but calculate your final answer using
the formula and financial calculator methods.
Project X (Videotapes
of the Weather Report)
($46,000 Investment)
Project Y (Slow-Motion
Replays of Commercials)
($66,000 Investment)
Year
Cash Flow
Year
Cash Flow
1
$
23,000
1
$
33,000
2
21,000
2
26,000
3
22,000
3
27,000
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21,600
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Common Stock
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Source of Capital
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