Investment $96,000 $132,000 Expected after-tax cash flows: Year 1 $40,000 $52,000 Year 2 $32,000 $56,000 Year 3 $48,000 $40,000 Year 4 $24,000 $32,000 In addition, proposal B has an expected cash salvage value at the end of four years of $8,000. The present value of $1 due in 1, 2, 3, and 4 years at 15% is .86957, .75614, .65752, and .57175, respectively.

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
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Steve's Stoves Company, which desires a minimum rate of return on its investment projects of 15%, has two proposals under consideration. Their costs and expected cash flows are:

  A B
Initial Investment $96,000 $132,000
Expected after-tax cash flows:    
Year 1 $40,000 $52,000
Year 2 $32,000 $56,000
Year 3 $48,000 $40,000
Year 4 $24,000 $32,000


In addition, proposal B has an expected cash salvage value at the end of four years of $8,000. The present value of $1 due in 1, 2, 3, and 4 years at 15% is .86957, .75614, .65752, and .57175, respectively.

Using the profitability index method, determine which project, if either, should be accepted by the company.

 

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