Question

Coore Manufacturing has the following two possible projects. The required return is 12 percent.

Year	Project Y	Project Z
0	–$82,000	–$81,000
1	31,160	34,000
2	31,160	32,800
3	31,160	30,500
4	31,160	27,300

a.	What is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)
b.	What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
c.	Which, if either, of the projects should the company accept?

Answer 1

Present Value = Future value/ ((1+r)^t)
where r is the interest rate that is 12% and t is the time period in years.
Profitability index (PI) = (Sum of present values of future cash flows/Initial investment)
Net present value (NPV) = initial investment + sum of present values of future cash flows.
PROJECT Y
Year	0	1	2	3	4
cash flow	-82000	31160	31160	31160	31160
present value		27821.43	24840.56	22179.07	19802.74
PI	1.154193
NPV	12643.81
PROJECT Z
Year	0	1	2	3	4
cash flow	-81000	34000	32800	30500	27300
present value		30357.14	26147.96	21709.3	17349.64
PI	1.179803
NPV	14564.04
a) The profitability index for project Y is 1.154 and the profitability index
for project Z is 1.179.
b) The NPV for Project Y is $12643.81 and the NPV for project Z is $14564.04.
c) The company should accept project Z because it has a higher PI and a higher NPV.