Project A Project B Net present value (a) $ 2,000 $ 3,500 Investment required (b) $ 5,000 $ 10,000 Profitability index Formula = Investment required / Net Present Value Using the method of profitability index, Which project should be selected? CHOICES: project A project B both

Project A Project B Net present value (a) $ 2,000 $ 3,500 Investment required (b) $ 5,000 $ 10,000 Profitability index Formula = Investment required / Net Present Value Using the method of profitability index, Which project should be selected? CHOICES: project A project B both

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter15: Capital Investment Analysis

Section: Chapter Questions

Problem 15.3.3P

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

NEED ASAP!!!!

Consider the following:

Project A Project B

Net present value (a) $ 2,000 $ 3,500

Investment required (b) $ 5,000 $ 10,000

Profitability index Formula = Investment required / Net Present Value Using the method of profitability index, Which project should be selected?

CHOICES:

project A

project B

both

none of these

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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