Question

Exercise 11-10 NPV and profitability index LO P3

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		$	(176,325	)			$	(150,960	)
Expected net cash flows in year:
1			37,000					26,000
2			55,000					51,000
3			77,295					53,000
4			93,400					78,000
5			58,000					37,000

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?

For each alternative project compute the net present value.

	Project A Initial Investment $176,325 Chart Values are Based on: i = Year Cash Inflow x PV Factor = Present Value 1 = 2 = 3 = 4 = 5 = Project B Initial Investment $150,960 Year Cash Inflow x PV Factor = Present Value 1 = 2 = 3 = 4 = 5 =

For each alternative project compute the profitability index. If the company can only select one project, which should it choose?

	Profitability Index Choose Numerator: / Choose Denominator: = Profitability Index / = Profitability index Project A 0 Project B 0 If the company can only select one project, which should it choose?

Answer 1

Company should choose Project A, since it has higher NPV and Higher Profitability