Question

Problem 10.43 You are analyzing two proposed capital investments with the following cash flows: Year Project X Project Y - $20,000 0 - $20,000 7,470 1 12,430 2 7,470 5,960 3 5,560 7,470 7,470 4 1,920 The cost of capital for both projects is 10 percent. Calculate the profitability index (PI) for each project. (Do not round discount factors. Round intermediate calculations to 2 decimal places, e.g. 15.25 and final answer to 4 decimal places, e.g. 1.2527.) The PI for project X is and the PI for project Y is Which project, or projects, should be accepted if you have unlimited funds to invest? If you have unlimited funds you should invest i project Y both projects neither project project X Which project should be accepted if they are m If they are mutually exclusive you should invest in Open Show Work Click if you would like to Show Work for this question:

Answer 1

Profitability index of X = 1.0857
Profitability index of Y = 1.1839

If the projects are independent then both the projects must be accepted as the profitability index of both the projects is greater than 1.

If the projects are mutually exclusive then the project Y must be accepted because it has a greater profitability index.

profitability Index of x (P.I) : Present value of cashin flow ofx 12,430 + 5960 +5560 + 1920 (1010) C1-10)² (1-10)3 (1-10)4 = $21, 714.31 → 0 = $20,000 Cost P.I of x= =100857 profitability Index of 4:- 4 7,470 present value of Cash, seo о+7 (1-10) n=) 0 = Cost P. I of 4= = $23,678.89 $20,000 = 1.1839