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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? 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 Project A Initial Investment $ Chart Values are Based on: 8 % Cash Year Inflow 1 39,000x 2 59,000 x 3 81,295 x 4 77,400X 5 64,000x Present Value 36,114 X = PV Factor 0.9260 0.8570 X = 0.7940 X = 0.7350 = 0.6810 52,277 X 64,548 56,889 43,584 253,412 $ X $ Net present value Present value of cash inflows Present value of cash outflows X X $ 253,412 186,325 65,373 X Initial Investment Year = 1 Project B $ Cash Inflow 38,000x 61,000 X 67,000 79,000x 29,000 X 2 157,960 PV Factor 0.9260 = 0.8570 0.7940 0.7350 0.6810 3 00000 Present Value 35,188 X 52,277 53,198 58,065 19,749 218,477 4 5 $ Net present value Present value of cash inflows Present value of cash outflows X $ x 218,477 157,960 60,517 X 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: Choose 1 Denominator: Present value of net cash flows 1 Initial investment Project 251,698 1 $ A 186,325 Project $ 218,477 1 $ B 157,960 If the company can only select one project, which should it choose? Profitability Index Profitability index 1.35 Il Il 1.38 Project B

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