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 2 years 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
2
6,000
2
11,000
3
7,000
3
12,000
4
6,600
4
14,000
a. Calculate the profitability index for
project X. (Round "PV Factor" to 3 decimal places. Round
the final...
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 13 percent. Use Appendix B.
Project X (DVDs
of the Weather Reports)
($18,000 Investment)
Project Y (Slow-Motion
Replays of Commercials)
($38,000 Investment)
Year
Cash Flow
Year
Cash Flow
1
$9,000
1
$19,000
2
7,000
2
12,000
3
8,000
3
13,000
4
7,600
4
15,000
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You are asked to evaluate the following two projects for Boring
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($46,000 Investment)
Year
Cash Flow
1
23,000
2
21,000
3
22,000
4
21,000
Project Y (Slow-Motion Replays of Commercials)
($66,000 Investment)
Year
Cash Flow
1
33,000
2
26,000
3
27,000
4
29,000
a. Calculate the profitability index for project X. (Round "PV
Factor" to 3 decimal places. Round the final answer...
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)
($54,000 Investment)
Project Y (Slow-Motion
Replays of Commercials)
($74,000 Investment)
Year
Cash Flow
Year
Cash Flow
1
$
27,000
1
$
37,000
2
25,000
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30,000
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25,000
3
31,000
4
23,600
4
33,000...
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) ($20,000 Investment) Project Y (Slow-Motion
Replays of Commercials) ($40,000 Investment) Year Cash Flow Year
Cash Flow 1 $ 10,000 1 $ 20,000 2 8,000 2 13,000 3 9,000 3 14,000 4
8,600 4 16,000...
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 12 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)
($48,000 Investment)
Project Y (Slow-Motion
Replays of Commercials)
($68,000 Investment)
Year
Cash Flow
Year
Cash Flow
1
$
24,000
1
$
34,000
2
22,000
2
27,000
3
23,000
3
28,000
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22,600
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30,000...
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Norton corporation. Use a discount rate of 11 percent. Use Appendix
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Project X (Videotapes
of the Weather Report)
($38,000 Investment)
Project Y (Slow-Motion
Replays of Commercials)
($58,000 Investment)
Year
Cash Flow
Year
Cash Flow
1
$
19,000
1
$
29,000
2
17,000
2
22,000
3
18,000
3
23,000
4
17,600
4
25,000...
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
4
21,600
4
29,000
You have been asked to estimate the appropriate discount rate to use in the evaluation of...
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Source of Capital
Market Value
Bonds
350,000
Preferred Stock
200,000
Common Stock
450,000
To finance the new project, the company will sell:
12-year bonds with a $1,000 par value paying 8% per year (paid
semiannually) at the market price of $980.
Preferred stock paying a...
You have been asked to estimate the appropriate discount rate to use in the evaluation of...
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use in the evaluation of a new line of business. You have
determined the market value of the firm’s target capital structure
as follows:
Source of Capital
Market Value
Bonds
350,000
Preferred Stock
200,000
Common Stock
450,000
To finance the new project, the company will sell:
12-year bonds with a $1,000 par value paying 8% per year (paid
semiannually) at the market price of $980.
Preferred stock paying a...
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