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Cori’s sausage corp is trying to choose between the following two mutually exclusive design projects: Year...

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Finance

Cori’s sausage corp is trying to choose between the followingtwo mutually exclusive design projects: Year cashflow (1) cashflow(2) 0 -55,000 -29800 1 26200 14700 2 26200 14700 3 26200 14700 a-1.If the required return is 10% what is the profitability for eachproject? (round your answers to three decimal places) a-2. if thecompany applies the profitability index decision rule, whichproject should the firm accept? 1 or 2. b-1. What is the NPV foreach project? (round answers to two decimal places) b-2. If thecompany applies the NPV decision rule, which project should itchoose? 1 or 2

Answer & Explanation Solved by verified expert
3.9 Ratings (559 Votes)

a-1
Project 1
PI= (NPV+initial inv.)/initial inv.
=(10155.52+55000)/55000
1.18
Project 2
PI= (NPV+initial inv.)/initial inv.
=(6756.72+29800)/29800
1.23
a-2 : choose 2 as it has higher PI
b-1
Project 1
Discount rate 0.1
Year 0 1 2 3
Cash flow stream -55000 26200 26200 26200
Discounting factor 1 1.1 1.21 1.331
Discounted cash flows project -55000 23818.18 21652.89 19684.45
NPV = Sum of discounted cash flows
NPV Project 1 = 10155.52
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
Project 2
Discount rate 0.1
Year 0.00% 1 2 3
Cash flow stream -29800 14700 14700 14700
Discounting factor 1 1.1 1.21 1.331
Discounted cash flows project -29800 13363.64 12148.76 11044.33
NPV = Sum of discounted cash flows
NPV Project 2 = 6756.72
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
b-2 : choose 1 as it has higher NPV

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Transcribed Image Text

Cori’s sausage corp is trying to choose between the followingtwo mutually exclusive design projects: Year cashflow (1) cashflow(2) 0 -55,000 -29800 1 26200 14700 2 26200 14700 3 26200 14700 a-1.If the required return is 10% what is the profitability for eachproject? (round your answers to three decimal places) a-2. if thecompany applies the profitability index decision rule, whichproject should the firm accept? 1 or 2. b-1. What is the NPV foreach project? (round answers to two decimal places) b-2. If thecompany applies the NPV decision rule, which project should itchoose? 1 or 2

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