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Following is information on two alternative investments being considered by Jolee Company. The company requires a...

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Accounting

Following is information on two alternative investments beingconsidered by Jolee Company. The company requires a 10% return fromits investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1)(Use appropriate factor(s) from the tablesprovided.)

Project AProject B
Initial investment$(184,325)$(156,960)
Expected net cash flows in year:
154,00031,000
249,00054,000
385,29551,000
481,40070,000
554,00029,000


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

Answer & Explanation Solved by verified expert
4.0 Ratings (800 Votes)

1
Project A
Initial investment 184325
Chart values are based on:
i= 10%
Year Cash inflow PV factor Present value
1 54000 0.9091 49091
2 49000 0.8264 40494
3 85295 0.7513 64082
4 81400 0.6830 55596
5 54000 0.6209 33529
242792
Present value of cash inflows 242792
Present value of cash outflows 184325
Net present value 58467
Project B
Initial investment 156960
Chart values are based on:
i= 10%
Year Cash inflow PV factor Present value
1 31000 0.9091 28182
2 54000 0.8264 44626
3 51000 0.7513 38316
4 70000 0.6830 47810
5 29000 0.6209 18006
176940
Present value of cash inflows 176940
Present value of cash outflows 156960
Net present value 19980
b
Present value of net cash flows / Initial investment = Profitability index
Project A = 242792/184325= 1.3172
Project B = 176940/156960= 1.1273
Project A should be selected

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