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The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B,...

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Accounting

The treasurer of Amaro Canned Fruits, Inc., has projected thecash flows of Projects A, B, and C as follows:

  

YearProject AProject BProject C
0?$205,000?$370,000?$205,000
1132,000228,000142,000
2132,000228,000112,000

  

Suppose the relevant discount rate is 7 percent per year.

  

a.

Compute the profitability index for each of the three projects.(Do not round intermediate calculations. Round your answersto 2 decimal places, e.g., 32.16.)


   


b.

Compute the NPV for each of the three projects. (Do notround intermediate calculations. Round your answers to 2 decimalplaces, e.g., 32.16.)


   

Answer & Explanation Solved by verified expert
3.9 Ratings (549 Votes)

a. profitability index = present value of cash inflow / cash outflow

present value of cash flow

year PV FACTOR AT 7% PRESENT VALUE Project A B C
1 [1/1.07]1 0.9345794 123364.4808[0.9345794*132000] 213084.1032[0.9345794*228000] 132710.2748[0.9345794*142000]
2 [1/1.07]2 0.8734387 115293.9084[0.8734387*132000] 199144.0236[0.8734387*228000] 97825.1344[0.8734387*112000]
TOTAL PRESENT VALUE 238658.398112 412228.1268 230535.4092

PROFITABILITY INDEX

A B C
PRESENT VALUE 238658.398112 412228.1268 230535.4092
CASH OUTFLOW 205000 370000 205000
PRESENT VALUE OF CASH INFLOW/ CASH OUTFLOW 1.16 1.11 1.12

B.NPV = PRESENT VALUE OF CASH INFLOW - CASH OUTFLOW

A B C
PRESENT VALUE 238658.398112 412228.1268 230535.4092
CASH OUTFLOW 205000 370000 205000
NET PRESENT VALUE $33658.40[238658.40-205000] $42228.13[412228.13-370000] $25535.41[230535.41-205000]

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