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a.
Adequate information:
Cash flows of Project A in Year 0= -$225,000
Cash flows of Project A in Year 1= $165,000
Cash flows of Project A in Year 2= $165,000
Cash flows of Project B in Year 0 = -$450,000
Cash flows of Project B in Year 1= $300,000
Cash flows of Project B in Year 2= $300,000
Cash flows of Project C in Year 0 = -$225,000
Cash flows of Project C in Year 1= $180,000
Cash flows of Project C in Year 2 = $135,000
To compute: Profitability index for each of the three projects.
Introduction: The profitability index is a budgeting technique that evaluates various investment proposals based on profitability.
b.
Adequate information:
Cash flows of Project A in Year 0= -$225,000
Cash flows of Project A in Year 1= $165,000
Cash flows of Project A in Year 2= $165,000
Cash flows of Project B in Year 0 = -$450,000
Cash flows of Project B in Year 1= $300,000
Cash flows of Project B in Year 2= $300,000
Cash flows of Project C in Year 0 = -$225,000
Cash flows of Project C in Year 1= $180,000
Cash flows of Project C in Year 2 = $135,000
To compute: The
Introduction: NPV is the net of the
c.
Adequate information:
Cash flows of Project A in Year 0= -$225,000
Cash flows of Project A in Year 1= $165,000
Cash flows of Project A in Year 2= $165,000
Cash flows of Project B in Year 0 = -$450,000
Cash flows of Project B in Year 1= $300,000
Cash flows of Project B in Year 2= $300,000
Cash flows of Project C in Year 0 = -$225,000
Cash flows of Project C in Year 1= $180,000
Cash flows of Project C in Year 2 = $135,000
To determine: The project that should be accepted based on the profitability index rule if all three projects are independent.
Introduction: The profitability index rule is the defined statement based on which investment projects are considered good or bad.
d.
Adequate information:
Cash flows of Project A in Year 0= -$225,000
Cash flows of Project A in Year 1= $165,000
Cash flows of Project A in Year 2= $165,000
Cash flows of Project B in Year 0 = -$450,000
Cash flows of Project B in Year 1= $300,000
Cash flows of Project B in Year 2= $300,000
Cash flows of Project C in Year 0 = -$225,000
Cash flows of Project C in Year 1= $180,000
Cash flows of Project C in Year 2 = $135,000
To determine: The project that should be accepted based on the profitability index rule if all the three projects are mutually exclusive.
Introduction: The projects are mutually exclusive when acceptance of a project depends on the other.
e.
Adequate information:
Cash flows of Project A in Year 0= -$225,000
Cash flows of Project A in Year 1= $165,000
Cash flows of Project A in Year 2= $165,000
Cash flows of Project B in Year 0 = -$450,000
Cash flows of Project B in Year 1= $300,000
Cash flows of Project B in Year 2= $300,000
Cash flows of Project C in Year 0 = -$225,000
Cash flows of Project C in Year 1= $180,000
Cash flows of Project C in Year 2 = $135,000
Budget for the projects= $450,000
To determine: The project that should be accepted if the projects are not divisible.
Introduction: NPV is the net present value of aggregate cash inflows and cash outflows associated with a project. A project with a positive NPV is preferable.
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Chapter 5 Solutions
CORPORATE FINANCE - LL+CONNECT ACCESS
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