Question

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		$	(171,325	)			$	(144,960	)
Expected net cash flows in:
Year 1			45,000					31,000
Year 2			51,000					47,000
Year 3			85,295					66,000
Year 4			94,400					68,000
Year 5			62,000					38,000

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?

Answer 1

			Project A
Initital investment			171,325
Chart values are Based on
i=	10%
Year	Cash	*	PV	=	Present
	inflow		Factor		Value
1	45,000	*	0.90909	=	40909
2	51,000	*	0.82645	=	42149
3	85,295	*	0.75131	=	64083
4	94,400	*	0.68301	=	64476
5	62,000	*	0.62092	=	38497
					250114
Present value of cash inflows					250114
present value of cash outflows					171325
Net Present value					78789
			project B
Initital investment			144,960
Chart values are Based on
i=	10%
Year	Cash	*	PV	=	Present
	inflow		Factor		Value
1	31,000	*	0.90909	=	28182
2	47,000	*	0.82645	=	38843
3	66,000	*	0.75131	=	49586
4	68,000	*	0.68301	=	46445
5	38,000	*	0.62092	=	23595
					186651
Present value of cash inflows					186651
present value of cash outflows					144960
Net Present value					41691
b)		Profitability Index
	Choose Numerator:				Choose Denominator		=	profitability index
	Present value of net cash flows			/	Initial Investment		=	profitability index
Project A	250114			/	171,325			1.45988
Project B	186651			/	144,960			1.28760
If the company can only select one project , which should it choose?							project A