Following is information on two alternative investments being considered by Jole
ID: 2429840 • Letter: F
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 $ (187,325) (149,960) Initial investment Expected net cash flows in year: 55,000 60,000 78,295 76,400 62,000 26,000 44,000 55,000 68,000 37,000 4 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?Explanation / Answer
Project A Initital investment 187,325 Chart values are Based on i= 8% Year Cash * PV = Present inflow Factor Value 1 55,000 * 0.92593 = 50926 2 60,000 * 0.85734 = 51440 3 78,295 * 0.79383 = 62153 4 76,400 * 0.73503 = 56156 5 62,000 * 0.68058 = 42196 262872 Present value of cash inflows 262872 present value of cash outflows 187325 Net Present value 75547 Project A Initital investment 149,960 Chart values are Based on i= 8% Year Cash * PV = Present inflow Factor Value 1 26,000 * 0.92593 = 24074 2 44,000 * 0.85734 = 37723 3 55,000 * 0.79383 = 43661 4 68,000 * 0.73503 = 49982 5 37,000 * 0.68058 = 25181 180621 Present value of cash inflows 180621 present value of cash outflows 149960 Net Present value 30661 b) Profitability Index Choose Numerator: Choose Denominator = profitability index Present value of net cash flows / Initial Investment = profitability index Project A 262872 / 187,325 1.40329 Project B 180621 / 149,960 1.20446 If the company can only select one project , which should it choose? project A