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FB Company is considering investing in two construction projects, and he developed the following estimates of the cash flows. His required return is 10% and views these projects as equally risky. Project 1 cash flows -$550,000 $150,000 $200,000 $150,000| $150,000 $100,000 Project 2 cash flows -$700,000 $200,000 $150,000 $250,000 $150,000 $150,000 Year 3 4 5

FB Company is considering investing in two construction projects, and he developed the following estimates of the cash flows. His required return is 10% and views these projects as equally risky. Project 1 cash flows -$550,000 $150,000 $200,000 $150,000| $150,000 $100,000 Project 2 cash flows -$700,000 $200,000 $150,000 $250,000 $150,000 $150,000 Year 3 4 5

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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b)  Calculate the profitability index (PI) of each project, assess its acceptability, and indicate which project is best using PI.

FB Company is considering investing in two construction projects, and he developed the following estimates of the cash flows. His required return is 10% and views these projects as equally risky. |Project 1 cash flows -$550,000 $150,000 $200,000 $150,000 $150,000 $100,000 Project 2 cash flows -$700,000 $200,000 $150,000 $250,000 $150,000 $150,000 Year 1 5
Transcribed Image Text:FB Company is considering investing in two construction projects, and he developed the following estimates of the cash flows. His required return is 10% and views these projects as equally risky. |Project 1 cash flows -$550,000 $150,000 $200,000 $150,000 $150,000 $100,000 Project 2 cash flows -$700,000 $200,000 $150,000 $250,000 $150,000 $150,000 Year 1 5
Expert Solution
Step 1

Formula for Profitability Index

= (Net Present value + Initial investment) / Initial investment.

 

To calculate NPV in excel, use NPV function

=NPV(rate,value1,[value2],…) + Initial investment

 

Rate = required rate of return

Values = cash Inflows

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