Question

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Year The Sloan Corporation is trying to choose between the following two mutually exclusive design projects: Cash Flow Cash Flow (LU) -$74,000 - $17.000 34.000 9,200 34,000 9,200 34,000 9,200 WNO 2-1 If the required return is 12 percent, what is the profitability index for both projects? (Do not round intermediate calculations. Round your answers to 3 decimal places e.g., 32.161.) Project Project II a-2 if the company applies the profitability index decision rule, which project should the firm accept? O Project! O Project 11 b-1 What is the NPV for both projects? A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g.. 32.16.) Project Project II

Answer 1

Ans a-1) Project 1: 1.10

PROJECT 1
Year	Project Cash Flows (i)	DF@ 12%	DF@ 12% (ii)	PV of Project ( (i) * (ii) )
1	34000	1/((1+12%)^1)	0.893	30,357.14
2	34000	1/((1+12%)^2)	0.797	27,104.59
3	34000	1/((1+12%)^3)	0.712	24,200.53
		NPV		81,662.26
	Total of PV of Cash Inflows			81662.26
	Cash Outflows			74000
	Profitability Index =			1.10
Present value of cash Inflow / Initial Investment (Cash Outflows)				(81662.26/74000)

Ans a-1) Project 2: 1.30

PROJECT 2
Year	Project Cash Flows (i)	DF@ 12%	DF@ 12% (ii)	PV of Project ( (i) * (ii) )
1	9200	1/((1+12%)^1)	0.893	8,214.29
2	9200	1/((1+12%)^2)	0.797	7,334.18
3	9200	1/((1+12%)^3)	0.712	6,548.38
		NPV		22,096.85
	Total of PV of Cash Inflows			22096.85
	Cash Outflows			17000
	Profitability Index =			1.30
Present value of cash Inflow / Initial Investment (Cash Outflows)				(22096.85/17000)

Ans a-2) Project 2, since it has higher PI.