Problem 24-4A (Algo) Applying net present value and profitability index LO P3

Rowan Company is considering two alternative investment projects. Each requires a $255,000 initial investment. Project A is expected to generate net cash flows of $65,000 per year over the next six years. Project B is expected to generate net cash flows of $55,000 per year over the next seven years. Management requires an 8% rate of return on its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Compute each projects net present value. 2. Compute each projects profitability index. 3. If the company can choose only one project, which should it choose, based on profitability index?

Required 1

Required 2

Required 3

Compute each projects net present value. (Do not round intermediate calculations. Round your present value factor to 4 decimals and your final answers to the nearest whole dollar.)

Project A	Net Cash Flows	x	Present Value of Annuity at 8%	=	Present Value of Net Cash Flows
Years 1-6				=	$0
Net present value
Project B	Net Cash Flows	x	Present Value of Annuity at 8%	=	Present Value of Net Cash Flows
Years 1-7				=	$0
Net present value

Required 1

Required 2

Required 3

Compute each projects profitability index. (Do not round intermediate values. Enter your answers rounded to the nearest whole dollar.)

Profitability Index
	Numerator:	/	Denominator:
		/		=	Profitability index
Project A					0
Project B					0