Answer:
a profitability index P1=1.27
profitability index P2= 1.41
b NPV P1 = $14145.01
NPV P2 = $6630.3
c YES ANSWERS ARE DIFFERENT due to fact that cash flows in P1 is higher than in P2
Step-by-step explanation:
profitability index or = <u> present value of an investment cash flows</u>=<u>67145.01</u>
benefit cost ratio initial cost 53000
For project 1 or P1
cost of capital 10 % = 1.27
initial investment = $53,000 since year 0
Year Cash flows (P1)$ present value of future cash flows PV
1 27,000 24545.46
2 27,000 22314.05
3 27,000 20285.50
Total = 67145.01
use the formula of present value of future cash flows = C/(1+i)ⁿ
C = cash = 27000
i = interest = 10% = 10/ 100 = 0.1
n = year = 1
year 1 = 27000/(1+0.1)¹ = 24545.46
year 2 = 27000/(1.1)² = 22314.05 note n = 2
year 3 = 27000(1.1)³ = 20285.50
Profitability index = 1.27 > 1 thus it should be accepted
profitability index or = <u>present value of an investment cash flows</u>=<u>22630.30</u>
benefit cost ratio initial cost 16000
For project 1 or P1
cost of capital 10 % = 1.41
initial investment = $16,000 since year 0
Year Cash flows (P2)$ present value of future cash flows PV
1 9,100 8272.73
2 9,100 7520.6
3 9,100 6836.97
Total = 22630.30
use the formula of present value of future cash flows = C/(1+i)ⁿ
C = cash = 9100
i = interest = 10% = 10/ 100 = 0.1
n = year = 1
year 1 = 9100/(1+0.1)¹ = 8272.73
year 2 = 9100/(1.1)² = 7520.6 note n = 2
year 3 = 9100(1.1)³ = 6836.97
Profitability index = 1.41 > 1 thus it should be accepted
Profitability index of P1 = 1.27 AND P2 1.41 SO Weiland Computer Corporation SHOULD TAKE P2
b Net Present Value (NPV) decision rule =∑ pv - initial investment required
P1 = 67145.01 - 53,000 = $14145.01
P2 = 22630.30 - 16000 = $6630.3
Weiland Computer should take P1 since P1 > P2 that is $14145.01 >$6630.3
C YES ANSWERS ARE DIFFERENT due to fact that cash flows in P1 is higher than in P2
