Following is information on two alternative investments being considered by Jole
ID: 2438567 • 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 B s(19e, 325) $(149,96) Project A Initial investment Expected net cash flows in year: 39,800 41,900 89,295 81,400 73,000 49,000 59,80e 66,000 70,000 22,800 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 190,325 Chart values are Based on i= 8% Year Cash * PV = Present inflow Factor Value 1 39,000 * 0.92593 = 36111 2 41,000 * 0.85734 = 35151 3 89,295 * 0.79383 = 70885 4 81,400 * 0.73503 = 59831 5 73,000 * 0.68058 = 49682 251661 Present value of cash inflows 251661 present value of cash outflows 190325 Net Present value 61336 Project B Initital investment 149,960 Chart values are Based on i= 8% Year Cash * PV = Present inflow Factor Value 1 40,000 * 0.92593 = 37037 2 59,000 * 0.85734 = 50583 3 66,000 * 0.79383 = 52393 4 70,000 * 0.73503 = 51452 5 22,000 * 0.68058 = 14973 206438 Present value of cash inflows 206438 present value of cash outflows 149960 Net Present value 56478 b) Profitability Index Choose Numerator: Choose Denominator = profitability index Present value of net cash flows / Initial Investment = profitability index Project A 251661 / 190,325 1.32227 Project B 206438 / 149,960 1.37662 If the company can only select one project , which should it choose? project B