The Michner Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (I) 0 -$ 80,000 1 31,000 Cash Flow (II) 2 3. 40,000 46,000 -$ 38,000 13,000 27,500 19,500 a-1. If the required return is 14 percent, what is the profitability index for each project? Note: Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161. a-2. If the company applies the profitability index decision rule, which project should it take? b-1. If the required return is 14 percent, what is the NPV for each project? Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. b-2. If the company applies the net present value decision rule, which project should it take?

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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Problem 8-14 Problems with Profitability Index [LO 4, 6]
The Michner Corporation is trying to choose between the following two mutually exclusive design projects:
Year
Cash Flow (I)
Cash Flow (II)
0
-$ 80,000
-$ 38,000
1
31,000
13,000
2
27,500
3
19,500
40,000
46,000
a-1. If the required return is 14 percent, what is the profitability index for each project?
Note: Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.
a-2. If the company applies the profitability index decision rule, which project should it take?
b-1. If the required return is 14 percent, what is the NPV for each project?
Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.
b-2. If the company applies the net present value decision rule, which project should it take?
a-1. Project I
a-2.
Project II
b-1. Project I
b-2.
Project II
Transcribed Image Text:Problem 8-14 Problems with Profitability Index [LO 4, 6] The Michner Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (I) Cash Flow (II) 0 -$ 80,000 -$ 38,000 1 31,000 13,000 2 27,500 3 19,500 40,000 46,000 a-1. If the required return is 14 percent, what is the profitability index for each project? Note: Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161. a-2. If the company applies the profitability index decision rule, which project should it take? b-1. If the required return is 14 percent, what is the NPV for each project? Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. b-2. If the company applies the net present value decision rule, which project should it take? a-1. Project I a-2. Project II b-1. Project I b-2. Project II
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