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Exercise 24-10 NPV and profitability index LO P3 Following is information on two alternative investments being considered by Jolee Company. The company requires a 8% 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 $(186,325) Project B $(157,960) Initial investment Expected net cash flows in: Year 1 Year 2 Year 3 Year 4 Year 5 39,000 59,000 81,295 77,400 64,000 38,000 61,000 67,000 79,000 29,000 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? 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? Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required A Required B For each alternative project compute the net present value. 186,325 PV Project A Initial Investment $ Chart Values are Based on: i= 8% Cash Year Inflow 1 39,000x 2 59,000 3 81,295 4 77,400x 5 64,000 = Factor 0.9260 = 0.8570 X = Present Value 36,111 X 0.7940 X = 0.7350 0.6810 X = 50,583 64,548 56,889 43,584 251,715 $ $ Present value of cash inflows Present value of cash outflows Net present value 251,715 186,325 65,352 X $ Initial Investment Year 157,960 PV Factor 0.9260 = 1 Project B $ Cash x Inflow 38,000 61,000 x 67,000x 79,000 X x 29,000 2 Present Value 35,185 52,277 53,198 58,065 19,749 0.8570 0.7940 0.7350 0.6810 3 4 5 = $ 218,474 $ Present value of cash inflows Present value of cash outflows Net present value 218,474 157,960 60,514 X $ Required A 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: 1 Choose Denominator: Present value of net cash 1 flows Initial investment Project $ 251,677 X1 $ 186,325 A Project $ 218,474 1 $ B 157,960 If the company can only select one project, which should it choose? Profitability Index Profitability index 1.35 = II 1.38 Project B

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