Question

years, after which he plans to scrap the equipment and retire to the beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return is 13 percent. What is the project's Pl? Should it be accepted? 8. Calculating Profitability Index Suppose the following two independent investment opportunities are available to Fitz, Inc. The appropriate discount rate is 8.5 percent Project Alpha Project Beta Year wnio -$2,700 1,500 1,300 1,100 - $4,100 900 2,600 3,200 a. Compute the profitability index for each of the two projects. b. Which project(s) should the company accept based on the profitability index rule? INTERMEDIATE (Questions 9-21) 9. Cash Flow Intuition - A project has an initial cost of I has a

Answer 1

YEAR cash flows Project Alpha -$2,700 $1,500 $1,300 $1,100 i Project Beta $4,100 $900 $2,600 $3,200 NPV pv @ 8.5% 1.0000 0.9217 0.8495 0.7829 discounted cash flows Project Alpha -$2,700.00 $1,382.49 $1,104.29 $861.20 $647.98 Project Beta -$4,100.00 $829.49 $2,208.58 $2,505.31 $1,443.38 Profitability index = 1 + NPV = initial investment = || 1.240 1+(647.98/2700) 1.352 1+(1443.38/4100) Profitability index Project Alpha Project Beta 1.240 1.352 Accept both projects