Question

Following is information on two alternative investments being considered by Jolee Company. The company requires a 6% 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		$	(183,325	)			$	(155,960	)
Expected net cash flows in year:
1			51,000					36,000
2			48,000					57,000
3			76,295					63,000
4			78,400					81,000
5			60,000					28,000

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?
a)

	Project A Initial Investment $183,325 Chart Values are Based on: i = Year Cash Inflow x PV Factor = Present Value 1 = 2 = 3 = 4 = 5 = Project B Initial Investment $155,960 Year Cash Inflow x PV Factor = Present Value 1 = 2 = 3 = 4 = 5 =

b

	Profitability Index Choose Numerator: / Choose Denominator: = Profitability Index / = Profitability index Project A 0 Project B 0 If the company can only select one project, which should it choose?

Answer 1

Ans.	PROJECT A:
	Initial Investment	$183,325
	Chart values are based on :
	i	6%
	Year	Cash inflow    *	P V Factor	Present Value
	1	$51,000	0.943	$48,093
	2	$48,000	0.890	$42,720
	3	$76,295	0.840	$64,088
	4	$78,400	0.792	$62,093
	5	$60,000	0.747	$44,820
	Total Present Value Of Cash Inflow			$261,814
	Present value of cash inflows			$261,814
	Less: Investment			-$183,325
	Net present value			$78,489
	PROJECT B:
	Initial Investment	$155,960
	Chart values are based on :
	i	6%
	Year	Cash inflow    *	P V Factor	Present Value
	1	$36,000	0.943	$33,948
	2	$57,000	0.890	$50,730
	3	$63,000	0.840	$52,920
	4	$81,000	0.792	$64,152
	5	$28,000	0.747	$20,916
	Total Present Value Of Cash Inflow			$222,666
	Present value of cash inflows			$222,666
	Less: Investment			-$155,960
	Net present value			$66,706
	*Calculation of Present value factors:   (PV @ 6%)
	Year		PV @ 6%
	1	1 / (1 + 0.06)^1	0.943
	2	1 / (1 + 0.06)^2	0.890
	3	1 / (1 + 0.06)^3	0.840
	4	1 / (1 + 0.06)^4	0.792
	5	1 / (1 + 0.06)^5	0.747
Ans. B	Profitability index =   Present vlaue of cash inflow / Investment
	Project A	$261,814 / $183,325	1.43
	Project B	$222,666 / $155,960	1.43
	*Both projects have equal Profitability index, so we can't use this method for comparison.
	Therefore, we need to consider Net present value method for the profitability measurement.
	Hence, Project A should be selected as it has a higher NPV.