Question

Following is information on two alternative investments being considered by Jolee Company. The company requires a 12% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

	Project A					Project B
Initial investment		$	(178,325	)			$	(144,960	)
Expected net cash flows in:
Year 1			53,000					36,000
Year 2			59,000					52,000
Year 3			92,295					52,000
Year 4			95,400					70,000
Year 5			57,000					31,000

a. For each alternative project compute the net present value.
b. For each alternative project compute the profitability index. If the company can only select one project, which should it choose?

• Required A
• Required B

For each alternative project compute the net present value.

	Project A Initial Investment $178,325 Chart Values are Based on: i = % Year Cash Inflow x PV Factor = Present Value 1 = 2 = 3 = 4 = 5 = Project B Initial Investment $144,960 Year Cash Inflow x PV Factor = Present Value 1 = 2 = 3 = 4 = 5 =

• Required B

For each alternative project compute the profitability index. If the company can only select one project, which should it choose?

	Profitability Index Choose Numerator: / Choose Denominator: = Profitability Index / = Profitability index Project A Project B If the company can only select one project, which should it choose?

Answer 1

a) Net Present value is calculated as folllows:

Years	Annual Cash Flow (A)	Annual Cash Flow (B)	PV Factor@12%(C)	Present Value(A*C)	Present Value(B*C)
1	53,000	36,000	0.8929	47,324	32,144
2	59,000	52,000	0.7972	47,035	41,454
3	92,295	52,000	0.7118	65,696	37,014
4	95,400	70,000	0.6355	60,627	44,485
5	57,000	31,000	0.5674	32,342	17,590
		Total		$ 253,024	$172,687

Net Present Value = Total Present Value - Initial Invesment

Project A = $ 253,024 - $178,325  

= $74,699

Project B = $172,687 - $144,960

= $27,727

b)Profitability index is calculated below:

Profitability index = Present Value of Future Cash Flow/ Initial Investment

Project A = $253,024 /$178,325

= 1.42

Project B = $172,687/$144,960

= 1.19