Melton Manufacturing Ltd is considering two alternative investment projects. The first project calls for a major renovation of the company’s manufacturing facility. The second involves replacing just a few obsolete pieces of equipment in the facility. The company will choose one project or the other this year, but it will not do both. The cash flows associated with each project appear below and the firm discounts project cash flows at 10%. Year Renovate Replace 0 –$4,000,000 –$1,300,000 1 2,000,000 1,000,000 2 2,000,000 700,000 3 2,000,000 300,000 4 2,000,000 150,000 5 2,000,000 150,000 Calculate the profitability index (PI) of each project and based on this criterion, indicate which project you would recommend for acceptance.
Melton Manufacturing Ltd is considering two alternative investment projects. The first project calls for a
major renovation of the company’s manufacturing facility. The second involves replacing just a few
obsolete pieces of equipment in the facility. The company will choose one project or the other this year,
but it will not do both. The cash flows associated with each project appear below and the firm discounts
project cash flows at 10%.
Year Renovate Replace
0 –$4,000,000 –$1,300,000
1 2,000,000 1,000,000
2 2,000,000 700,000
3 2,000,000 300,000
4 2,000,000 150,000
5 2,000,000 150,000
Calculate the profitability index (PI) of each project and based on this criterion, indicate which
project you would recommend for acceptance.
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