Homework SourseCourtesy Caravan Inc may invest in only one of three new pro
Courtesy Caravan, Inc. may invest in only one of three new projects. Due to other capital constraints, they have decided to base their decision on each project’s profitability index. The company has a cost of capital of 9.0%.
a. What is the profitability index for each project? (Round your answers to four decimal places.)
| Cash Flows (millions) | |||||||||||||||||||
| Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | |||||||||||||||
| Project A | (280 | ) | 100 | 130 | 150 | 200 | |||||||||||||
| Project B | (300 | ) | 130 | 150 | 180 | 190 | |||||||||||||
| Project C | (380 | ) | 160 | 180 | 200 | 260 | |||||||||||||
Solution
Formula for profitability index = (NPV + Initial investment) / Initial investment
For Project A
For project B
For project C
| 0 | 1 | 2 | 3 | 4 | |
| Cashflow | -280 | 100 | 130 | 150 | 200 |
| present value | -280 | 91.74312 | 109.4184 | 115.827522 | 141.6850422 |
| NPV | 178.67 | ||||
| Profitability Index | 1.6381 |
