Question

In: Accounting

Mountain Brook Company is considering two investment opportunities whose cash flows are provided below: Year Investment...

Mountain Brook Company is considering two investment opportunities whose cash flows are provided below:

Year Investment A Investment B
0 $ (15,000)         $ (9,000)        
1 5,000         5,000        
2 5,000         4,000        
3 5,000         3,000        
4 4,000         1,000        

   
The company's hurdle rate is 12%. What is the present value index of Investment A? (Do not round your PV factors and intermediate calculations.)

Multiple Choice

  • 1.01

  • 1.00

  • 0.97

  • None of these answers is correct.

Solutions

Expert Solution

Year

Cash flow ($)

Present value interest factor@ 12%

Present Value of Cash flow ($)

1

5,000

0.8929

4465.0

2

5,000

0.7972

3986.0

3

5,000

0.7118

3559.0

4

4,000

0.6355

2542.0

Present Value of Cash Inflows

14552.0

Initial Investment of Investment A = $15000

Present Value of cash inflows = $14552

Present Value Index = Present Value of cash inflow / Initial Investment

                                      = 14552 / 15000

                                      = 0.97

Correct answer is 0.97

ekkarill92 answered 11 months ago
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