Question

The Weiland Computer Corporation is trying to choose between the following mutually exclusive design projects, P1 and P2:

Answer 1

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 = present value of an investment cash flows=67145.01

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 = present value of an investment cash flows=22630.30

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