Net present value method: Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method. Profitability index: Profitability index is a technique, which is used to rank the proposals of the business. It is used by the management when the business has more investment proposals and limited fund. The Profitability index is computed as follows: Profitability index = Total present value of net cash flow Amount to be invested To determine: The net present value and profitability index for the given proposals.

Question

Want to see the full answer?

Answer 1

Question

Chapter 12, Problem 12.3DI

To determine

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Profitability index:

Profitability index is a technique, which is used to rank the proposals of the business. It is used by the management when the business has more investment proposals and limited fund.

The Profitability index is computed as follows:

Profitability index =Total present value of net cash flowAmount to be invested

To determine: The net present value and profitability index for the given proposals.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Ranger Corporation has decided to invest in renewable energy sources to meet part of its energy needs for production. It is considering solar power versus wind power. After considering cost savings as well as incremental revenues from selling excess electricity into the power grid, it has determined the following. Solar Wind Present value of annual cash flows $52,580 $128,450 Initial investment $39,500 $105,300 Determine the net present value and profitability index of each project. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answers to 0 decimal places, e.g. 125 and profitability index answers to 2 decimal places, e.g. 15.25.) Solar Wind Net present value $ $ Profitability index Which energy source should it choose? The company should choose energy source.

Crane Corporation has decided to invest in renewable energy sources to meet part of its energy needs for production. It is considering solar power versus wind power. After considering cost savings as well as incremental revenues from selling excess electricity into the power grid, it has determined the following. Solar Wind Present value of annual cash flows $56,090 $130,820 Initial investment $39,500 $105,500 Determine the net present value and profitability index of each project. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round present value answers to 0 decimal places, e.g. 125 and profitability index answers to 2 decimal places, e.g. 15.25.) Solar Wind Net present value $enter a dollar amount rounded to 0 decimal places $enter a dollar amount rounded to 0 decimal places Profitability index enter the number rounded to 2 decimal places…

Yokam Company is considering two alternative projects. Project 1 requires an initial investment of $400,000 and has a present value of cash flows of $1,100,000. Project 2 requires an initial investment of $4,000,000 and has a present value of cash flows of $6,000,000. 1. Compute the profitability index for each project. 2. Based on the profitability index, which project should the company prefer? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Compute the profitability index for each project. Project 1 Project 2 Choose Numerator: Profitability Index T 7 Choose Denominator: 4 of 5 180 # Next > G O