Following is information on two alternative investments bein

Following is information on two alternative investments being considered by Jolee Company. The company requires a 8% 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.)
  

a. For each alternative project compute the net present value.
b. For each alternative project compute the profitability index. If the company can only select one project, which should it choose?

	Project A	Project B
Initial investment		$	(184,325	)			$	(154,960	)
Expected net cash flows in year:
1			50,000					29,000
2			60,000					55,000
3			75,295					48,000
4			78,400					83,000
5			71,000					22,000

Solution

Answer =1 CACULATION OF PRESTN VALUE OF THE PROJECT A Period Particulars Amount PVF @ 8% Present Value 0 Outflow $     -1,84,325.00 $                       1.000 $         -1,84,325.00 1 Inflow $          50,000.00 $                       0.926 $               46,296.30 2 Inflow $          60,000.00 $                       0.857 $               51,440.33 3 Inflow $          75,295.00 $                       0.794 $               59,771.60 4 Inflow $          78,400.00 $                       0.735 $               57,626.34 5 Inflow $          71,000.00 $                       0.681 $               48,321.41 Total $               79,130.97 CACULATION OF PROFITABILITY INDEX OF PROJECT A Profitability Index = 1 + Net present Value / Initial investment Profitability Index =          1 + $          79,130.97 \"/\" By $           1,84,325.00 Profitability Index =          1 + $                     0.43 Profitability Index =          1.43 Answer =2 CACULATION OF PRESTN VALUE OF THE PROJECT B Period Particulars Amount PVF @ 8% Present Value 0 Outflow $     -1,54,960.00 $                       1.000 $         -1,54,960.00 1 Inflow $          29,000.00 $                       0.926 $               26,851.85 2 Inflow $          55,000.00 $                       0.857 $               47,153.64 3 Inflow $          48,000.00 $                       0.794 $               38,103.95 4 Inflow $          83,000.00 $                       0.735 $               61,007.48 5 Inflow $          22,000.00 $                       0.681 $               14,972.83 Total $               33,129.74 CACULATION OF PROFITABILITY INDEX OF PROJECT B Profitability Index = 1 + Net present Value / Initial investment Profitability Index =          1 + $          33,129.74 \"/\" By $           1,54,960.00 Profitability Index =          1 + $                     0.21 Profitability Index =          1.21 Note: If we have to select any one of the project from the Project A & prject B then we can select the onlu Project A because the NPV and Profitability index of the Project A is greater than Project B. Decision: Select the Project A