Question

Following is information on two alternative investments being considered by Tiger Co. The company requires a 6% 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 X1 $ (124,000) Project X2 $ (208,000) Initial investment Expected net cash flows in year: 47,000 57,500 82,500 93,000 83,000 73,000 a. Compute each project's net present value b. Compute each project's profitability index. If the company can choose only one project, which should it choose? Complete this question by entering your answers in the tabs below Required A Required B Compute each project's net present value. (Round your final answers to the nearest dollar.) Net Cash Present Value Present Value of of 1 at 6% Net Cash Flows Flows Project X1 Year 1 Year 2 Year 3 Totals Amount invested Net present value Project X2 Year 1 Year 2 Year 3 Totals Amount invested Net present value

Answer 1

Answer:

Explanation:

NPV is today's value of expected cash flows - today's value of invested cash.

Therefore, we need to identify current worth of cash flows by doing this:

47000/(1+0.06) +57500/(1+0.06)^2 + 82500/(1+0.06)^3 = 44339.6+51174.8+69268.6 = 164783

To find NPV we subtract investment amount from 164783. So, 164783 - 124000 = 40783. This is an NPV of first project x1

Now, we do the same calculations for project x2:

93000/(1+0.06) +83000/(1+0.06)^2 +73000/(1+0.06)^3 = 87736+73870+61292= 222898

222898 - 208000(investments) = 14898

Now let's calculate profitability index:

PI = Present value of future cash flows/ initial investment

PI for project x1 = 164783/124000 = 1.33

PI for project x2 = 222898/208000 = 1.071

From our calculations of NPV and Profitability Index we can see that project x1 should be chosen because it has higher NPV and profitability index