Following is information on two alternative investments being considered by Jole
ID: 2432159 • Letter: F
Question
Following is information on two alternative investments being considered by Jolee Company The company requires a 10% 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 Expected net cash flows in year S(177,325) (159,960) 46,000 54,000 75,295 94,400 64,000 35,000 59,000 63,000 81,000 33,000 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?Explanation / Answer
(a)
Calculation of NPV of Project A
Initial investment = $177,325
NPV of Project A = Present value of cash inflows - Initial investment
= 247,183.75 - 177,325
= $69,858.75
Calculation of NPV of Project B
Initial investment = $159,960
NPV of Project B = Present value of cash inflows - Initial investment
= 203,678 - 159,960
= $43,718
(b)
Calculation of profitability index
Profitability index of Project A = Present value of cash inflows/Initial investment
= 247,183.75/177,325
= 1.3940
Profitability index of Project B = Present value of cash inflows/Initial investment
= 203,678/159,960
= 1.2733
Conclusion:
If one project is to be chosen, Project A should be chosen since its NPV and Profitability index, both are higher as compared to NPV and Profitability Index of Project B.
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Year Cash inflow (i) PVF(ii) Present value of cash inflows (i) x (ii) 1 46,000 0.909 41,814 2 54,000 0.826 44,604 3 75,295 0.751 56,546.55 4 94,400 0.683 64,475.20 5 64,000 0.621 39,744 247,183.75