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You are asked to evaluate the following two projects for the Norton corporation. Use a discount...

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Finance

You are asked to evaluate the following two projects for theNorton corporation. Use a discount rate of 12 percent. Use AppendixB for an approximate answer but calculate your final answer usingthe formula and financial calculator methods.

Project X (Videotapes
of the Weather Report)
($48,000 Investment)		Project Y (Slow-Motion
Replays of Commercials)
($68,000 Investment)
YearCash FlowYearCash Flow
1$24,0001$34,000
222,000227,000
323,000328,000
422,600430,000

  
a. Calculate the profitability index for projectX. (Do not round intermediate calculationsand round your answer to 2 decimal places.)

    

  
b. Calculate the profitability index for projectY. (Do not round intermediate calculations and round youranswer to 2 decimal places.)


c. Which project would you select based on theprofitability index?

  • Project X

  • Project Y

Answer & Explanation Solved by verified expert
3.6 Ratings (668 Votes)

a

Project X
Discount rate 0.12
Year 0 1 2 3 4
Cash flow stream -48000 24000 22000 23000 22600
Discounting factor 1 1.12 1.2544 1.404928 1.5735194
Discounted cash flows project -48000 21428.57 17538.27 16370.95 14362.709
NPV = Sum of discounted cash flows
NPV Project X = 21700.49
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
PI= (NPV+initial inv.)/initial inv.
=(21700.49+48000)/48000
1.45
b
Project Y
Discount rate 0.12
Year 0 1 2 3 4
Cash flow stream -68000 34000 27000 28000 30000
Discounting factor 1 1.12 1.2544 1.404928 1.5735194
Discounted cash flows project -68000 30357.14 21524.23 19929.85 19065.542
NPV = Sum of discounted cash flows
NPV Project Y = 22876.77
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
PI= (NPV+initial inv.)/initial inv.
=(22876.77+68000)/68000
1.34

c

Choose Project X as it has higher PI
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