Question: You must choose between the two projects whose cash flows are shown below. The projects have the same risk. a. Compute the net present value

You must choose between the two projects whose cash flows are shown below.

The projects have the same risk.

a. Compute the net present value (NPV) and the profitability index (PI) for the two projects. Assume a 10 percent discount rate.
b. Which of the projects is better according to each of the two methods?
c. What is the explanation for the differences in rankings between the NPV and PI methods of analysis?
d. Which method is correct? Why?

Project A Project B Now End-of-Year 1 End-of-Year 2 End-of-Year 3 -$16,000 10,500 9,100 3,000 -$3,200 3,300 1,260 600

Step by Step Solution

★★★★★

3.42 Rating (171 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a Using a spreadsheet b Project B is a better choice based on the profitability index rule while pro... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

427-B-F-F-M (5810).docx

120 KBs Word File

Students Have Also Explored These Related Finance Questions!

You must choose between a no-load, open-end mutual fund with an annual expense ratio of 0.85 percent but no transaction cost and an ETF with an annual expense ratio of 0.25 percent and a transaction...

You must choose between investing in stock A and stock B. You have already used CAPM to calculate the rate of return you should expect to receive for each stock given their systematic risk and...

Suppose a certain laser can provide 140 TW of power in 0.96 ns pulses at a wavelength of 0.25 m. How much energy is contained in joules in a single pulse?

The net present value rule versus the profitability index rule. You must choose between the two projects whose cash flows are projects have the same risk. Compute the net present value (NPV) and the...

Please do not copy and paste another response, and please do not use excel. Need to see by hand or with financial calculator. Thank you. d. Which of these projects should you ideally choose? 8. The...

8. The net present value rule versus the profitability index rule. You must choose between the two projects whose cash flows are shown below. The projects have the same risk. Project A Project B Now...

a, compute the net present walue and the profitablity index for the two peorets. Assume a 10% divcount risk #8 You must choose between the two projects whose cash flows are shown below. the projects...

Please do not copy and paste an existing answer. should be selected? 10. The net present value rule versus the profitability index rule. You must choose between the two projects whose cash flows are...

Please do not cut and paste another post. d. Which of these projects should you ideally choose? 8. The net present value rule versus the internal rate of return rule. You must choose between the two...

Isadores Implements, Inc., manufactures pens and mechanical pencils often used for gifts. Overhead costs are currently allocated using direct labor-hours, but the controller has recommended an...

What are the three main mechanisms for generation of vertical air motion?

If a monopoly firm is earning profits, how much would you expect these profits to be diminished by entry in the long run?

Retail communications must be (A) approved by a principal of the firm (B) filed with FINRA at least 10 business days prior to first use (C) made available to more than 25 retail investors within a...

An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity equal to 9.6 percent. One bond, Bond C, pays an annual coupon of 10...

Define each of the following terms: a. Proxy; proxy fight; takeover; preemptive right; classified stock; founders shares b. Closely held corporation; publicly owned corporation c. Secondary market;...

Two investors are evaluating AT&Ts stock for possible purchase. They agree on the expected value of D1 and also on the expected future dividend growth rate. Further, they agree on the riskiness of...

A firm has the following total revenue and total cost schedules: TR = $20. TC = $5,000 + $1.4Q. a. What is the break-even level of output? Round your answer to the nearest whole number. 3846 units...

1. Database Design A SmartFit is a fitness center, and they need to create a Fitness Center Management (FCM) system to keep track of their transactions. Assume that you are hired by an organization...

Project cash flow and NPV. The managers of Classic Autos Incorporated plan to manufacture classic Thunderbirds (1957 replicas). The necessary foundry equipment will cost a total of $4,300,000 and...