Question

Following is information on two alternative investments being considered by Tiger Co. The company requires a 15% 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 Project X2
Initial investment $ (98,000 ) $ (144,000 )
Expected net cash flows in:
Year 1 36,000 76,500
Year 2 46,500 66,500
Year 3 71,500 56,500
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?

Answer 1

Answer:

X1 NPV = $15,477.44

X2 NPV = $9,954.96

X1 PI = 1.16

X2 P2 = 1.07

X1 should be chosen

Explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

NPV can be calculated using a financial calculator  

X1

Cash flow in year 0 = -98,000

Cash flow in year 1 = 36,000

Cash flow in year 2 = 46,500

Cash flow in year 3 =  71,500

I = 15%

NPV = 15,477.44

X2

Cash flow in year 0 = (144,000 )

Cash flow in year 1 = 76,500

Cash flow in year 2 = 66,500

Cash flow in year 3 = 56,500

I = 15%

NPV = 9954.96

profitability index = 1 + (NPV / Initial investment)

X1 - 1 + (15,477.44 / 98,000) = 1.16

X2 - 1 + (9954.96 / 144,000) = 1.07

X1 should be chosen because it has a higher NPV. this means that the project is more profitable than X2

To determine NPV using a financial calculator take the following steps:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute