Question

Cori’s sausage corp is trying to choose between the following two mutually exclusive design projects: Year cashflow (1) cashflow (2) 0 -55,000 -29800 1 26200 14700 2 26200 14700 3 26200 14700 a-1. If the required return is 10% what is the profitability for each project? (round your answers to three decimal places) a-2. if the company applies the profitability index decision rule, which project should the firm accept? 1 or 2. b-1. What is the NPV for each project? (round answers to two decimal places) b-2. If the company applies the NPV decision rule, which project should it choose? 1 or 2

Answer 1

a-1
Project 1
PI= (NPV+initial inv.)/initial inv.
=(10155.52+55000)/55000
1.18
Project 2
PI= (NPV+initial inv.)/initial inv.
=(6756.72+29800)/29800
1.23
a-2 : choose 2 as it has higher PI
b-1
Project 1
Discount rate	0.1
Year	0	1	2	3
Cash flow stream	-55000	26200	26200	26200
Discounting factor	1	1.1	1.21	1.331
Discounted cash flows project	-55000	23818.18	21652.89	19684.45
NPV = Sum of discounted cash flows
NPV Project 1 =	10155.52
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Project 2
Discount rate	0.1
Year	0.00%	1	2	3
Cash flow stream	-29800	14700	14700	14700
Discounting factor	1	1.1	1.21	1.331
Discounted cash flows project	-29800	13363.64	12148.76	11044.33
NPV = Sum of discounted cash flows
NPV Project 2 =	6756.72
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
b-2 : choose 1 as it has higher NPV