a-1. What is the NPV of each project if the discount rate is 10%? (Do not round intermediate calculations. Round your answers to 2 decimal places.) a-2. Which project has the higher NPV? b-1. What is the profitability index of each project? (Do not round intermediate calculations. Round your answers to 2 decimal places.) b-2. Which project has the higher profitability index? c. Which project is most attractive to a firm that can raise an unlimited amount of funds to pay for its investment projects? d. Which project is most attractive to a firm that is limited in the funds it can raise?
Consider projects A and B with the following cash flows:
| C0 | C1 | C2 | C3 | |||||||||||||||||
| A | − | $ | 27 | + | $ | 16 | + | $ | 16 | + | $ | 16 | ||||||||
| B | − | 52 | + | 27 | + | 27 | + | 27 | ||||||||||||
a-1. What is the
a-2. Which project has the higher NPV?
b-1. What is the profitability index of each project? (Do not round intermediate calculations. Round your answers to 2 decimal places.)
b-2. Which project has the higher profitability index?
c. Which project is most attractive to a firm that can raise an unlimited amount of funds to pay for its investment projects?
d. Which project is most attractive to a firm that is limited in the funds it can raise?
NPV is the discounted value of future cash inflows.
NPV is calculated by discounting the cash inflows using the discounting rate.
NPV = Present value of Cash inflows - Total initial investment
| Years |
Cash Inflow (a) |
Discounting rate @ 10% (b) |
PV of Cash inflows (a) * (b) |
| 1 | 16 | 0.9091 | 14.55 |
| 2 | 16 | 0.8264 | 13.22 |
| 3 | 16 | 0.7513 | 12.02 |
| Total | 39.79 |
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