The Michner Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (I) Cash Flow (II) 0 −$ 82,000 −$ 40,000 1 32,000 13,200 2 42,000 29,500 3 48,000 22,500 a-1. If the required return is 15 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 15 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 −$ 82,000 −$ 40,000
1 32,000 13,200
2 42,000 29,500
3 48,000 22,500

a-1. If the required return is 15 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 15 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?

 

 

 

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