Mason Company has a choice of two investment alternatives. The present value of
ID: 2534790 • Letter: M
Question
Mason Company has a choice of two investment alternatives. The present value of cash inflows and outflows for the first alternative is $160,000 and $114,000, respectively. The present value of cash inflows and outflows for the second alternative is $335,000 and $280,000, respectively.
Required
Calculate the net present value of each investment opportunity. (Negative amounts should be indicated by a minus sign.)
Calculate the present value index for each investment opportunity. (Round "PVI" to 2 decimal places.)
Indicate which investment will produce the higher rate of return.
Explanation / Answer
Net present value: First alternative 46000 =160000-114000 Second alternative 55000 =335000-280000 Present value index: First alternative 1.40 =160000/114000 Second alternative 1.20 =335000/280000 First alternative will produce the higher rate of return.