The treasurer of Tropical Fruits Inc has projected the cash

The treasurer of Tropical Fruits Inc. has projected the cash flows of Projects A, B, and C as follows:

Year Project A Project B Project C

0 -$155,000 -$305,000 -$155,000

1 111,000 202,000 121,000

2 111,000 202,000 91,000

Suppose the relevant discount is 9% per year.

a. Compute the profitability index for each of the three porjects: (Do not round intermediate calculations and round your answers to 2 decimal places)

Project A:

Project B:

Project c:

b. Compute the NPV for each of the three projects. (Do not round intermediate calculations and round your answers to 2 decimal places)

Project A:

Project B:

Project C:

Solution

Requirement (a) – Profitability Index

Profitability Index = Present Value of Annual cash inflows / Initial Investment

Project A

= [ ($1,11,000 x 0.917431193) + ($1,11,000 x 0.841679993)] / 155,000

= [$1,01,834.86 + 93,426.48] / $155,000

= $ 1,95,261.34 / 155,000

= 1.26

Project B

= [ ($202,000 x 0.917431193) + ($202,000 x 0.841679993)] / 305,000

= [$1,85,321.10 + 1,70,019.36] / 305,000

= $ 3,55,340.46 / 305,000

= 1.17

Project C

= [ ($121,000 x 0.917431193) + ($91,000 x 0.841679993)] / 155,000

= [$1,11,009.17 + 76,592.88] / 155,000

= $1,87,602.05 / 155,000

= 1.21

Requirement (b) – Net Present Value [NPV] of the project

Net Present Value [NPV] = Present Value of Annual Cash inflows – Initial Investment

Project – A

= $1,95,261.34 - 155,000

= $ 40,261.34

Project – B

= $ 3,55,340.46 - 305,000

= $ 50,340.46

Project – C

= $1,87,602.05 - 155,000

= $ 32,602.05