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 15 percent. Use Appendix B.
Project X (DVDs of the Weather Reports)
($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 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 15 percent. Project Y Project X
Solutions
Expert Solution
Answer a.
Profitability Index = Present Value of Cash Inflows / Initial
Investment
Profitability Index = $62,374 / $46,000
Profitability Index = 1.36
Answer b.
Profitability Index = Present Value of Cash Inflows / Initial
Investment
Profitability Index = $82,720 / $66,000
Profitability Index = 1.25
Answer c.
Project X:
Net Present Value = Present Value of Cash Inflows - Initial
Investment
Net Present Value = $62,374 - $46,000
Net Present Value = $16,374
Project Y:
Net Present Value = Present Value of Cash Inflows - Initial
Investment
Net Present Value = $82,720 - $66,000
Net Present Value = $16,720
NPV of Project Y is higher but PI of Project X is higher; therefore, the company should accept Project X as it is providing higher return for each dollar of investment.
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
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
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 12 percent. Use Appendix B.
Project X (DVDs
of the Weather Reports)
($36,000 Investment)
Project Y (Slow-Motion
Replays of Commercials)
($56,000 Investment)
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...
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
2
30,000
3
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
4
22,600
4
30,000...
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 11 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)
($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...
You have been asked to estimate the appropriate discount rate to
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...
You have been asked to estimate the appropriate discount rate to use in the evaluation of...
You have been asked to estimate the appropriate discount rate to
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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