Following is information on two alternative investmenis being considered by Tige
ID: 2430763 • Letter: F
Question
Following is information on two alternative investmenis being considered by Tiger Co. The coma quires a 4% return from its investments. Project X1 Project X2 $(80,000) $(120,000) Initial investment Expected net cash flows in year 25,000 35,500 60,500 60,000 50,000 40,000 Compute each project's (a) net present value and (b) profitability index. (Round present value calculations to the nearest dollar and round the profitability index to two decimal places.) If the company can choose only one project, which should it choose? Explain.Explanation / Answer
Answer Calculation of Net Present Value Project X 1 Years Cash Flows P. V @ 4% Present Value Initial Investment 1 $ (80,000) 1 $ (80,000) Annual Cash Flow 1 $ 25,000 0.962 $ 24,050 2 $ 35,500 0.925 $ 32,838 3 $ 60,500 0.889 $ 53,785 Net Present Value $ 30,672 Project X 1 Years Cash Flows P. V @ 4% Present Value Initial Investment 1 $ (120,000) 1 $ (120,000) Annual Cash Flow 1 $ 60,000 0.962 $ 57,720 2 $ 50,000 0.925 $ 46,250 3 $ 40,000 0.889 $ 35,560 Net Present Value $ 19,530 Profitability Index = Net present Value / Investment required Project X 1 Profitability Index = 30672/80000 0.38 Project X 2 Profitability Index = 19530/120000 0.16 The company should choose Project X1 as it has higher NPV and Higher Profitability Index than Project X2