Problem 12-19 Use of profitability index [L012-4) answer using the formula and f

Question

Problem 12-19 Use of profitability index [L012-4) answer using the formula and financial calculator methods X (Videotapes of the Weather Report) ($20,000 Investment) of $10,000 8,000 9,000 8,600 S 20,000 14,000 16,000 a calculate the profitability index for project X. (Do not round intermediate calculations and round your answer to 2 decimal places.) to 2 decimal places) b. Calculate the profitability index for project Y (Do not round intermediate calculations and ropnd your answer c. Which project would you select? 0 O Type here to

Explanation / Answer

Profitability Index = Present value of Future Cash Flows / initial Investment Year Project AXCash Flow Project Y Cash Flow P.V.@ 14% P.V. Of Project X P.V. of Project Y 1 $          10,000 $              20,000 0.877 $     8,770.00 $   17,540.00 2 $             8,000 $              13,000 0.769 $     6,152.00 $      9,997.00 3 $             9,000 $              14,000 0.675 $     6,075.00 $      9,450.00 4 $             8,600 $              16,000 0.592 $     5,091.20 $      9,472.00 Total Cash Flows $   26,088.20 $   46,459.00 Initial Investment $   20,000.00 $   40,000.00 Profitability Index Project X = $26088.20 / $20000 1.30 Profitability Index Project Y =    $46459 / $40000 1.16 Note: The project X will be selected, because its profitability index is highr than the Project Y

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