Following is information on two alternative investments projects being considered by Tiger Company. The company requires a 10% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Project X1Project X2Initial investment$ (112,000)$ (170,000)Net cash flows in: Year 141,00084,000Year 251,50074,000Year 376,50064,000 a. Compute each project’s net present value.b. Compute each project’s profitability index. If the company can choose only one project, which should it choose on the basis of profitability index? The table is structured to analyze two projects, X1 and X2, over three years, calculating their net cash flows and the present value of these cash flows, assuming a discount rate of 10%.### Table Description:#### Columns:1. **Net Cash Flows**: Represents the cash inflows or outflows for each year of projects X1 and X2.2. **Present Value of 1 at 10%**: Lists the present value factors for each year at a 10% discount rate. These factors are used to calculate the present value of each cash flow.3. **Present Value of Net Cash Flows**: Calculated by multiplying the net cash flows by the present value factor for each respective year.#### Rows:- **Project X1**: - Year 1 - Year 2 - Year 3 - Totals: These fields will summarize the total net cash flows and their present values over the three years. - Initial investment: The initial cash outlay at the start of the project. - Net present value: The difference between the present value of cash inflows and the initial investment.- **Project X2**: - Year 1 - Year 2 - Year 3 - Totals: Similarly summarizes total net cash flows and present values. - Initial investment - Net present valueThis table is used to assess the financial viability of projects X1 and X2 using Net Present Value (NPV) analysis, a key component in capital budgeting decisions. **Profitability Index**| | **Numerator:** | / | **Denominator:** | / | | = | **Profitability Index** ||-----------------------------------|---------------|---|------------------|---|---------------------------|---|------------------------|| **Project X1** | | | | | | | || **Project X2** | | | | | | | |If the company can choose only one project, which should it choose on the basis of profitability index?---**Explanation:**This table is designed to determine the profitability index for two projects, X1 and X2. The profitability index helps in evaluating and prioritizing projects based on their expected returns. It is calculated as a ratio where the "Numerator" and "Denominator" fields are used to enter project-specific financial metrics. This table leaves these fields blank, indicating that specific values need to be filled in to make the analysis.**Decision-Making Prompt:**At the bottom, the table poses a question regarding the selection of a project based on the calculated profitability index for each project. The project with the higher profitability index would typically be considered more attractive if both projects are exclusive choices.

Answered: Following is information on two…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Following is information on two alternative investments projects being considered by Tiger Company. The company requires a 10% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

	Project X1	Project X2
Initial investment	$ (112,000)	$ (170,000)
Net cash flows in:
Year 1	41,000	84,000
Year 2	51,500	74,000
Year 3	76,500	64,000

a. Compute each project’s net present value.
b. Compute each project’s profitability index. If the company can choose only one project, which should it choose on the basis of profitability index?

The table is structured to analyze two projects, X1 and X2, over three years, calculating their net cash flows and the present value of these cash flows, assuming a discount rate of 10%.

### Table Description:

#### Columns:
1. **Net Cash Flows**: Represents the cash inflows or outflows for each year of projects X1 and X2.
2. **Present Value of 1 at 10%**: Lists the present value factors for each year at a 10% discount rate. These factors are used to calculate the present value of each cash flow.
3. **Present Value of Net Cash Flows**: Calculated by multiplying the net cash flows by the present value factor for each respective year.

#### Rows:
- **Project X1**:
- Year 1
- Year 2
- Year 3
- Totals: These fields will summarize the total net cash flows and their present values over the three years.
- Initial investment: The initial cash outlay at the start of the project.
- Net present value: The difference between the present value of cash inflows and the initial investment.

- **Project X2**:
- Year 1
- Year 2
- Year 3
- Totals: Similarly summarizes total net cash flows and present values.
- Initial investment
- Net present value

This table is used to assess the financial viability of projects X1 and X2 using Net Present Value (NPV) analysis, a key component in capital budgeting decisions.

**Profitability Index**

| | **Numerator:** | / | **Denominator:** | / | | = | **Profitability Index** |
|-----------------------------------|---------------|---|------------------|---|---------------------------|---|------------------------|
| **Project X1** | | | | | | | |
| **Project X2** | | | | | | | |

If the company can choose only one project, which should it choose on the basis of profitability index?

---

**Explanation:**

This table is designed to determine the profitability index for two projects, X1 and X2. The profitability index helps in evaluating and prioritizing projects based on their expected returns. It is calculated as a ratio where the "Numerator" and "Denominator" fields are used to enter project-specific financial metrics. This table leaves these fields blank, indicating that specific values need to be filled in to make the analysis.

**Decision-Making Prompt:**

At the bottom, the table poses a question regarding the selection of a project based on the calculated profitability index for each project. The project with the higher profitability index would typically be considered more attractive if both projects are exclusive choices.

Expert Solution

Step 1

Time value of money :— According to this concept, value of money in present day is greater than the value of same sum of money in future date.

Net Present Value :— It is the sum of present value of all cash flows.

It is the difference between present value of cash Inflow and present value of cash outflow.

Profitability index :— It is calculated by dividing present value of cash inflow by present value of cash outflow.

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