Question

The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of projects A, B, and C as follows:

Year	Project A			Project B			Project C
0	−	$	215,000	−	$	380,000	−	$	215,000
1			138,000			232,000			152,000
2			138,000			232,000			118,000

  

Suppose the relevant discount rate is 9 percent per year.
  
a. Compute the profitability index for each of the three projects. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

  

	Profitability index
Project A
Project B
Project C

  

b. Compute the NPV for each of the three projects. (Do not round intermediate calculations. Round your answers to 2 decimal places, e.g., 32.16.)

  

	NPV
Project A	$
Project B	$
Project C	$

  

c. Suppose these three projects are independent. Which project(s) should Amaro accept based on the profitability index rule?
  

	Project A
	Project B
	Project C
	Project A, Project B, Project C
	Project A, Project B
	Project A, Project C
	Project B, Project C

  
d. Suppose these three projects are mutually exclusive. Which project(s) should Amaro accept based on the profitability index rule?
  

	Project B
	Project A
	Project C
	Project A, Project B
	Project A, Project B, Project C
	Project A, Project C
	Project B, Project C

  
e. Suppose Amaro’s budget for these projects is $595,000. The projects are not divisible. Which project(s) should Amaro accept?
  

	Project A
	Project B
	Project C
	Project A, Project B, Project C
	Project B, Project C
	Project B, Project A
	Project A, Project C

Answer 1

		Cash flow		Present value
	Year	Project A	Project B	Project C	PVIF @ 9%	Project A	Project B	Project C
	0	-215,000	-380,000	-215,000	1.0000	(215,000.00)	(380,000.00)	(215,000.00)
	1	138,000	232,000	152,000	0.9174	126,605.50	212,844.04	139,449.54
	2	138,000	232,000	118,000	0.8417	116,151.84	195,269.76	99,318.24
		NPV =				27,757.34	28,113.80	23,767.78
Ans a)
	PI A =	(27757.24+215000)/215000	1.13
	PI B =	(28113.80+380000)/380000	1.07
	PI C =	(23767.78+215000)/215000	1.11
Ans b)	NPV A	27,757.34
	NPV B	28,113.80
	NPV C	23,767.78
Ans c)	correct answer is option :
	Project A, Project B, Project C
Ans d)	correct answer is option :
	Project B
Ans e)	correct answer is option :
	Project B, Project A