Problem 8-17 NPV and Profitability Index [LO 4,6 Robben Manufacturing has the fo

Question

Problem 8-17 NPV and Profitability Index [LO 4,6 Robben Manufacturing has the following two possible projects. The required return is 9 percent 0 28,200 - 62,000 14,200 12,600 15,000 10,600 16,000 33,000 14,000 31,000 a. What is the profitability index for each project? (Do not round intermediate calculations and round your answers to 3 decimal places, e.g. 32.161.) Project Y Project Z b. What is the NPV for each project? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) NPV Project Y Project Z c. Which, if either, of the projects should the company accept? Project Z Neither Project Y

Explanation / Answer

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

PI = (NPV + Initial investment)/Initial investment

Project Y:

NPV = -28200 + 14200/(1+0.09)^1 + 12600/(1+0.09)^2 + 15000/(1+0.09)^3 + 10600/(1+0.09)^4 = 14524.75

PI = (14524.75 + 28200) / 28200 = 1.515

Project Z:

NPV = -62000 + 16000/(1+0.09)^1 + 33000/(1+0.09)^2 + 14000/(1+0.09)^3 + 31000/(1+0.09)^4 = 13226.09

PI = (13226.09+62000)/62000 = 1.213

Choose project Y. Because NPV and PI are higher for project Y than project Z.

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