Following is information on two alternative investments being considered by Tige
ID: 2560462 • Letter: F
Question
Following is information on two alternative investments being considered by Tiger Co. The company requires a 4% return from its investments. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Compute each project’s net present value.
Compute each project’s profitability index.
Following is information on two alternative investments being considered by Tiger Co. The company requires a 4% return from its investments. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)
Explanation / Answer
1(a)
Net present value = Present value of cash inflows - Present value of cash outflows
Project X1 = 110,672 - 80,000 = 30,672
Project X2 = 139,530 - 120,000 = 19,530
1(b)
Profitability index = Present value of future cash flows / Initial investment
Project X1 = 110,672 / 80,000 = 1.3834
Project X2 = 139,530 / 120,000 = 1.16275
2.
If the company sholuld choose - Project X1 should be selcted(on the basis of NPV and Profitability index).
Project X1 Project X2 Present value of cash inflows each year : 1 24,050 (25,000*0.962) 57,720 (60,000*0.962) 2 32,837.5 (35,500*0.925) 46,250 (50,000*0.925) 3 53,784.5 (60,500*0.889) 35,560 (40,000*0.889) 110,672 139,530