Question

You are asked to evaluate the following two projects for the Norton corporation. Use a discount rate of 11 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. Project X (Videotapes of the Weather Report) ($22,000 Investment) Project Y (Slow-Motion Replays of Commercials) ($42,000 Investment) Year Cash Flow Year Cash Flow 1 $ 11,000 1 $ 21,000 2 9,000 2 14,000 3 10,000 3 15,000 4 9,600 4 17,000 a. Calculate the profitability index for project X. (Do not round intermediate calculations and round your answer to 2 decimal places.) b. Calculate the profitability index for project Y. (Do not round intermediate calculations and round your answer to 2 decimal places.) c. Which project would you select based on the profitability index? Project X Project Y

Answer 1

Cash flows Year Project X Project Y 0 $ -22,000 $ -42,000 1 $ 11,000 $ 21,000 2 $ 9,000 $ 14,000 3 $ 10,000 $ 15,000 15,000 4 $ 9,600 $ 17,000 PVIF@10% 1.000 $ 0.909 $ 0.826 $ 0.751 $ 0.683 $ Present value Project X Project Y (22,000.00) $ (42,000.00) 10,000.00 $ 19,090.91 7,438.02 $ 11,570.25 7,513.15 $ 11,269.72 6,556.93 $ 11,611.23 Net present value $ 9,508.09 $ 11,542.11 Profitability index 1.43 1.27 =1+9508.09/22000 =1+11542.11/42000 Select project X

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