Question

Following is information on two alternative investments being considered by Jolee Company. The company requires a 8% 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 $ (185,325 ) $ (153,960 ) Expected net cash flows in year: 1 38,000 28,000 2 59,000 43,000 3 81,295 65,000 4 79,400 85,000 5 73,000 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

Ans.	Project A:
	1	$38,000	0.92593	$35,185.19
	2	$59,000	0.85734	$50,582.99
	3	$81,295	0.79383	$64,534.59
	4	$79,400	0.73503	$58,361.37
	5	$73,000	0.68058	$49,682.57
	Total Present value of cash inflow			$258,346.71
	Net present value = Present value of cash inflow - Investment
		258346.71 - 185235
		73111.71
	Profitability index = Present value of cash inflow / Investment
		258346.71 / 185235
		1.39
	Project B:
	Year	Cash inflows	Pv @ 8%	PV of cash inflows
	1	$28,000	0.92593	$25,925.93
	2	$43,000	0.85734	$36,865.57
	3	$65,000	0.79383	$51,599.10
	4	$85,000	0.73503	$62,477.54
	5	$38,000	0.68058	$25,862.16
	Total Present value of cash inflow			$202,730.29
	Net present value   = Present value of cash inflow - Investment
		202730.29 - 153960
		48770.29
	Profitability index = Present value of cash inflow / Investment
		202730.29 / 153960
		1.32
	*Project A should be selected because its net present value and profitability index are higher than project B,
	*Calculation of PV @8%:
	Year
	1	1 / (1 + 0.08)^1	0.92593
	2	1 / (1 + 0.08)^2	0.85734
	3	1 / (1 + 0.08)^3	0.79383
	4	1 / (1 + 0.08)^4	0.73503
	5	1 / (1 + 0.08)^5	0.68058