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Calculate the profitability index for project

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Reference no: EM131162691

Q1. You have a project with the following cash flow stream (assume a 10% discount rate).  What is the profitability index of the project?  Is it acceptable?

Initial investment                                        ($76,000)

Year 1                                                           $20,000

Year 2                                                           $20,000

Year 3                                                           $20,000

Year 4                                                           $22,000

Year 5                                                           $32,000

Disinvestment                                        ($4,000) at Year 5

Part A: Calculate the profitability index for this project

Part B: Is the project favorable?  Why or why not?

Q2. An investment opportunity costing $85,000 is expected to yield net cash flows of $15,000 annually over six years.

Part A:  Calculate the Net Present Value of the investment at a discount rate of 12%.

Part B:  Does the capital expenditure appears to be a favorable investment?  Why or Why not?

Q3. Smith Company has an investment opportunity to purchase a new machine costing $75,000 that is expected to yield the following net  cash flows over the next five years:

Year 1:            $15,000

Year 2:            $30,000

Year 3:            $45,000

Year 4:            $30,000

Year 5:            $15,000

In year 5, Smith Company can get salvage value on the machine 5,000. Find the NPV of the investment at a discount rate of 10%.  Should you accept this project?  Why or why not?

Q4. ETP Co. has an investment opportunity costing $80,000 that is expected to yield the following cash flows over the next ten years:

Year 1:            $15,000

Year 2:            $15,000

Year 3:            $15,000

Year 4:            $15,000

Year 5:            $15,000

Year 6:            $15,000

Year 7:            $13,000

Year 8:            $14,000

Year 9:            $16,000

Year 10:          $12,000

Part A: Find the Net Present Value (NPV) and Profitability Index (PI) of the investment at a discount rate of 10%.

Part B: Does this capital project appear to be a favorable investment? Why or Why not?

Part C: If a second project (X) with a profitability index of 1.85 was also being considered, which project (ETP or X) would be best and WHY?

Reference no: EM131162691

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