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

Project A:
Year	Cashflows	PVF at 8%	Present value
1	38000	0.92593	35185.2
2	59000	0.85734	50583
3	81295	0.79383	64534.6
4	79400	0.73503	58361.4
5	73000	0.68058	49682.6
Present value of cash inflows			258347
Project B
Year	Cashflows	PVF at 8%	Present value
1	28000	0.92593	25925.9
2	43000	0.85734	36865.6
3	65000	0.79383	51599.1
4	85000	0.73503	62477.5
5	38000	0.68058	25862.2
Present value of cash inflows			202730
Req a:
NPV;
			Project A	Project B
Present value of inflows			258347	202730
Less: Initial Investment			-185325	-153960
Net present value			73022	48770
Project A shall be selected
Req b:
proftability Index:
			Project A	Project B
Present value of inflows			258347	202730
Divide: Initial Investment			185325	153960
Net present value			1.39	1.32
Project A shall be selected