Problem 12-19 Use of profitability index [LO4] You are asked to evaluate the fol
ID: 2654972 • Letter: P
Question
Problem 12-19 Use of profitability index [LO4]
You are asked to evaluate the following two projects for the Norton corporation. Use a discount rate of 14 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Calculate the profitability index for project X. (Do not round intermediate calculations and round your answer to 2 decimal places.)
Calculate the profitability index for project Y. (Do not round intermediate calculations and round your answer to 2 decimal places.)
Which project would you select?
You are asked to evaluate the following two projects for the Norton corporation. Use a discount rate of 14 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.
Explanation / Answer
Statement showing calculation of Profitability Index Project X Project Y Particulars Time PVF@14% Amount PV(Amount *PVF) Amount PV(Amount *PVF) Cash Outflows(Invt in project) - 1.0000 (54,000.000) (54,000.00) (74,000.000) (74,000.00) PV of Cash Outflows - (54,000.00) (74,000.00) Annual Cash Flows 1.000 0.8772 27,000.0000 23,684.21 37,000.0000 32,456.14 Annual Cash Flows 2.000 0.7695 25,000.0000 19,236.69 30,000.0000 23,084.03 Annual Cash Flows 3.000 0.6750 25,000.0000 16,874.29 31,000.0000 20,924.12 Annual Cash Flows 4.000 0.5921 23,600.0000 13,973.09 33,000.0000 19,538.65 PV of Cash Inflows 73,768.28 96,002.93 Profitability Index = PV of Future Cash Flows/ Initial Investment 1.3661 1.2973 Project X should be accepted on the basis of profitability index since it has higher PI than Project Y Time PVF@14% Working Notes 1.000 0.8772 1/1.14 2.000 0.7695 .8772/1.14 3.000 0.6750 .7695/1.14 4.000 0.5921 .6750/1.14 2.9137