Chapter 12, Problem 12.3DI

To determine

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Profitability index:

Profitability index is a technique, which is used to rank the proposals of the business. It is used by the management when the business has more investment proposals and limited fund.

The Profitability index is computed as follows:

$\text{Profitability index =}\frac{\text{Total present value of net cash flow}}{\text{Amount to be invested}}$

To determine: The net present value and profitability index for the given proposals.