Two projects, Project A and Project B, are available, each costing $500,000. The discount rate is...
Question:
Two projects, Project A and Project B, are available, each costing $500,000. The discount rate is 10%. Considering the cash flows given below, which project would be more profitable using the profitability index?
| Year | Project A | Project B |
| 1 | 150,000 | 50,000 |
| 2 | 200,000 | 150,000 |
| 3 | 250,000 | 200,000 |
| 4 | 150,000 | 300,000 |
| 5 | 100,000 | 200,000 |
Profitability Index:
The profitability index technique helps identify the more profitable project. The profitability index ratio uses the present value of cash inflows and investment cost in its calculations.
Answer and Explanation: 1
Become a Study.com member to unlock this answer! Create your account
View this answerLet's compute the profitability index for Projects A ad B to determine the most profitable project.
Profitability index for Project A:
| Year | Cash... |
See full answer below.
Ask a question
Our experts can answer your tough homework and study questions.
Ask a question Ask a questionSearch Answers
Learn more about this topic:
Get access to this video and our entire Q&A library
Profitability Index Method: Definition & Calculations
from
Chapter 14 / Lesson 5
5.3K
The profitability index method measures the acceptability of a project through the ratio of the projected cash inflow to the initial investment. Learn about the definition and calculation of profitability index and understand how to interpret its results.
Related to this Question
- Two projects, Project A and Project B, are available, each costing $500,000. The discount rate is 10%. Considering the cash flows given below, which project would be more profitable using the net present value (NPV) method? | Year | Project A | Project B
- Two projects, Project A and Project B, are available, each costing $500,000. The discount rate is 10%. Considering the cash flows given below, which project would be more profitable using the undiscounted payback period method? | Year | Project A | Proje
- If a project costing $70,000 has a profitability index of 1 and the discount rate was 12%, then the present value of the net cash flows was: A. greater than $70,000 B. undeterminable C. $70,000 D. less than $70,000
- Project A costs $10,000 and has annual cash flows of $2,900 for six years. The discount rate is 5%. Calculate the profitability index of the project. Should the firm accept the project?
- Consider a project with the following cash flows: Time 0 1 2 Cash Flow -$110 $70 $120 What is its profitability index if the cost of capital is 0.08?
- You estimate that a project will cost $27,700 and will provide cash inflows of $11,800 in year 1 and $24,600 in year 3. Based on the profitability index rule, should the project be accepted if the discount rate is 14 percent? Why or why not?
- A project costing $400 is to be depreciated straight-line over the 5-year life of the project to zero salvage value. Net income resulting from the project amounts to $100 years one and two and $150 in years 3 through 5. The project cash flows should be di
- A project with a cash outlay now is followed by positive expected cash flows in the future and a positive net present value. What does this information say about the project's discounted payback period, internal rate of return, profitability index, and av
- A cash flow that arises solely from a project that is being evaluated and hence should be included in the project analysis is known as: a- Accounting Income b- Incremental Cash Flows c- Project Life d- Opportunity Cost e-Sunk Cost
- What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent? Year Cash flow 0 -15,300 1 9,400 2 7,600 3 4,300
- If a project has a profitability index of 1.20, then the project's internal rate of return is: A) equal to the discount rate. B) less than the discount rate. C) greater than the discount rate. D) equal to 20%.
- Consider a project with cash flows: Year 0 1 2 3 4 5 P -$19 $10 $5 $3 $5 $10 Compute the profitability index based on a 10% cost of capital and compute the payback time.
- Spring Company has invested $20,000 in a project. Spring's discount rate is 12% and the project profitability index on the project is zero. Which of the following statements would be true? I. The net present value of the project is $20,000. II. The proj
- A project will produce cash inflows of $1,750 a year for four years. The project initially costs $10,600 to get started. In year five, the project will be closed and as a result should produce a cash inflow of $8,500. a. What is the net present value of
- A project is expected to produce cash flows of $48,000, $39,000, and $15,000 over the next three years, respectively. After three years, the project will be worthless. What is the present value of this project if the applicable discount rate is 15.25 perc
- Consider the project described in the table below. What Is the project's internal rate of return? The cost of capital rate is 13%. Time 0 1 2 3 4 Cash flows ($6,600) $2,400 $3,600 $2,000 $1,000 A. 15.81% B. 16.13% C. 16.29% D. 15.65%
- The .............................is the discount rate that equates the present value of a project's cash inflows with the present value of the project's outflows.
- Biogen, Inc. has a cost of capital of 8%, and it has a project with the following cash flows. What is the NPV of this project? What is the IRR of this project? Year Net Cash Flow 0 -200,000 1 -30,000 2 30,000 3 200,000 4 250,000 5 275,000
- Blanchford Enterprises is considering a project that has the following cash flow and cost of capital = 10%. Year 0 1 2 3 4 Cash flow -1000 500 500 500 500 What is the project's discounted payback?
- You are considering the following two projects and can take only one. You cost of capital is 10.6%. The cash flows for the two projects are as follows ($ million): Project Year 0 Year 1 Year 2 Year 3
- Suppose you are considering two projects, A and B, that each has a required rate of return of 10%. Both projects cost $5,000 and have a net present value of $150. Project A has an IRR of 16% and project B has an IRR of 15%. What is the crossover rate for
- A project with an initial investment of $50,000 and a profitability index of 1.239 also has an internal rate of return of 12%. The present value of net cash flows is: a. $56,000 b. $40,355 c. $61,950 d. $50,000
- A project with an initial investment of $42,000 and a profitability index of 1.239 also has an internal rate of return of 12%. The present value of net cash flows is: A. $42,000 B. $52,038 C. $47,040 D. $33,898
- A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year Cash Flows ($) 0 -24,674 1 14,328 2 10,944 3 10,216 What is the IRR for this project?
- Project X has a cost of $53,847 and its expected net cash flows are $12,000 p.a. for the next eight years. What is the project's internal rate of return?
- A project has a life of 10 years and no salvage value. Your firm uses a MARR of 8% to evaluate projects. The project has uncertain costs and revenue as shown in the table below: Initial Cost Probabil
- Your firm is considering a project with the following anticipated cash flows. Year 0 : -40,000 Year 1: 5,000 Year 2: 10,000 Year 3: 15,000 Year 4: 25,000 Year 5: 35,000 If the discount rate for the firm is 9%, what is the NPV of the project? (Please Sho
- A company has a minimum required rate of return of 9%. It is considering investing in a project that costs $50,000 and is expected to generate cash inflows of $20,000 at the end of each year for 3 years. The profitability index for this project is: a. 0.9
- The following are the cash flows of two projects: Year ; Project A ; Project B ; 0 ; - $ 290 ; - $ 290 ; 1 ; 170 ; 190 ; 2 ; 170 ; 190 ; 3 ; 170 ; 190 ; 4 ; 170 ; If the opportunity cost of capital is
- Compute the benefit-cost ratio and B-C criterion of the following project: Project cost P80,000 Gross income P25,000 per year Opening cost P6,000 per year Salvage value 0 Life of project 10 years Rate of interest 12%
- A project costing $20,000 generates cash inflows of $9,000 annually for the first 3 years, followed by cash outflows of $1,000 annually for 2 years. At most, this project has ____ different IRR(s). (a) one. (b) two. (c) three. (d) five.
- 1. The _______________ method of capital budgeting is based on income rather than cash flows. 2. The discount rate that makes the net present value of a project equal to zero is called the __________
- Using NPV will lead to the correct decision when evaluating projects with very different cash flow patterns over time. The firm can use the IRR on the incremental cash flows of the long-term project compared to the short-term project in order to achieve t
- For a project with cash flows of -$70,000 in the first year, and +$8,760 per year for each of 10 years thereafter, and a cost of capital of 10.0%, what is the project NPV?
- Net Present Value (NPV) analysis of a project reveals + $3,600 based on a discount rate of 12%. A) What does this tell us about the financial viability of the project? B) What does it not tell us? C) Why is the NPV method considered to be theoretically su
- Compute the cash payback period for each project. Rank the projects based on the computed payback period. Which project do you recommend?
- A weakness of the internal rate of return method for screening investment projects is that it A. implicitly assumes that the company is able to reinvest cash flows from the project at the company's discount rate. B. doesn't consider the time value of mo
- The interest rate that sets the present value of a project's cash inflows equal to the present value of the project's cost is called the _______________. a. present value b. discount rate c. internal rate of return d. payback period e. company cost o
- A project that provides annual cash flows of $17,600 for 9 years costs $82,000 today. 1. What is the NPV for the project if the required return is 8%? 2. What is the NPV for the project if the required return is 20%? 3. At what discount rate would you be
- YearCash Flow 0?$18,200 110,500 29,400 35,900 What is the profitability index for the set of cash flows if the relevant discount rate is 9 percent? (Do not round intermediate calculations and round yo
- The financial manager is evaluating two new projects. The firm has a cost of capital of 8%. The two projects are expected to have the following cash flows: Year Project A (R) Project B (R) 1 -50,000 -80,000 2 20,000 40,000 3 30,000 30,000 4 10,000 30,000
- Compute the net present value of the project taking all cash flows into consideration. Based on the value, should the company proceed with the project?
- A project is estimated to cost $77,766 and provide annual net cash flows of $26,000 for five years. Determine the internal rate of return for this project.
- A project is estimated to cost $362,672 and provide annual net cash flows of $76,000 for nine years. Determine the internal rate of return for this project.
- A project is estimated to cost $266,007 and provide annual net cash flows of $53,000 for 10 years. Determine the internal rate of return for this project.
- Bramble Inc. is comparing several alternative capital budgeting projects as shown below: Project A Project B Project C Initial investment $86,000 $126,000 $166,000 Present value of net cash flows 96,000 116,000 206,000 Using the profitability index, how m
- Winter wear is considering a 5-year project with an initial cost of $211,000. The project will induce cash inflows of $56,500 a year over the life of the project. What is the net present value if the required rate of return is 15.8 percent?
- A project with an initial cost of $28,300 is expected to generate cash flows of $6,900, $9,000, $9,250, $8,150, and $7,700 over each of the next five years, respectively. What is the project's payback period?
- Calculate the project cash flow generated for Project A and Project B using the NPV method. . Which project would you select, and why? . Which project would you select under the payback method? The di
- In comparing two projects, what is often used to evaluate the relative riskiness of the projects? a. net present value b. payback period c. discount rate d. internal rate of return
- At a discount rate of 4%, a project returns a positive NPV of 5,300 pounds. At 8%, it returns a negative NPV of 4,800 pounds. To be nearest whole%, what would the IRR of the project be?
- Project L costs $44,964.46, it's expected cash inflows are $10,000 per year for 9 years, and its WACC is 10%. What is the project's IRR?
- You are considering a project with an initial cash outlay of 60,000 Lira and expected free cash flows of 20,000 Lira at the end of each year for 5 years. The required rate of return for this project is 12%. A. Calculate the project's payback period. B.
- Consider the following two mutually exclusive projects: Year Cash Flow (X) Cash Flow (Y) 0 -$20,200 -$20,200 1 $8,900 $10,200 2 $9,200 $7,850 3 $8,850 $8,750 A. Calculate the IRR for each project. B. What is the crossover rate for these two projects? C. W
- A proposed project will cost $684,805 and will provide returns of $150,000 in Year 1, $300,000 in Year 2, and $400,000 in Year 3. There will not be any cash flows associated with the project after Year 3. If taxes are ignored, what is the internal rate o
- Project B Time (Years) 0 1 2 3 4 5 Cash Flow ($12,700) $3,520 $4,520 $1,860 $0 $1,340. Required: 1. Compute the payback statistic for Project B if the appropriate cost of capital is 11 percent and the
- The net present value of an investment project is $28,842 and its profitability index is 1.1518. The initial investment in this project was: a) $190,000. b) $25,041. c) $215,800. d) $185,200.
- If the discount rate is 25 percent, what is the present value of these cash flows?Wilkinson Co. has identified an investment project with the following cash flows: |Year|Cash flow |1|$840 |2|1,170 |3|1,430 |4|1,575
- A project has estimated annual cash flows of $94,000 for four years and is estimated to cost $261,000. Assume a minimum acceptable rate of return of 10%. a. Determine the net present value of the project. b. Determine the present value index.
- The project profitability index and the internal rate of return: a. will always result in the same preference ranking for investment projects. b. will sometimes result in different preference rankings for investment projects. c. are less dependable than t
- Projects A and B have cash flows of: Year 0 1 2 A -$80 $50 $50 B -$480 $300 $300 What do IRR and NPV analyses say about the two projects? Which project is more desirable?
- What is the profitability index for the set of cash flows if the relevant discount rate is 10%? Year Cash Flow 0 -$18,000 1 $10,300 2 $9,200 3 $5,700
- Trinitron Inc. is considering two projects. Project A has uneven cash flows while Project B has even cash flows. What would happen to the payback period of each project if it was determined that costs
- A project that costs $80,000 with a useful life of 5 years is being considered. Straight-line depreciation is being used and salvage value is $5,000. The project will generate annual cash inflows of $ 21,375. The accounting rate of return is: a. 26.7% b.
- Project Health One (H1) has a cost of $76,543, it expected net cash flows are $20,000 per year for 6 years, and its cost of capital is 10%. Calculate the project's NPV.
- A project costs $3,000 immediately. The project yields nominal returns of $100 in year 1, $200 in year 2, $300 in year 3, $400 in year 4, and $500 in year 5. In addition, the project will have capital
- A five-year project has a projected net cash flow of $15,000, $25,000, $30,000, $35,000, and $20,000 in the next five years. It will cost $80,000 to implement the project. If the required rate of return is 20%, determine the NPV and indicate if you would
- A project with an 8-year life has tangible costs and benefits with a $165,000 negative net present value. The company's discount rate is 9%. What amount of annual cash inflow would have to be provided by the project's intangible benefits for the project t
- Assume that you have an after-tax cost of capital of 10 percent. Compute the net present value of each of the five projects listed in the following table. After-Tax Cash Flow, End of Year Project 0 1 2 3 A $(10,000) $4,000 $4,000 $4,000 B $(10,000) $6,00
- 1. Project Orpheus has the following cash flows: Investment Cost -Php 100,000 1st Year-Revenue Php 30,000 2nd Year-Revenue Php 50,000 3rd Year-Revenue Php 70,000 4th Year-Revenue Php 90,000 Salvage V
- A company that is using the internal rate of return (IRR) to evaluate projects, should accept the project if the IRR: a. is greater than the project's net present value. b. is less than the project's net present value. c. is greater than the cost of capit
- Compute the NPV statistic for Project Y if the appropriate cost of capital is 10 percent. Project Y Time: 0 1 2 3 4 Cash flow $8,500 $3,730 $4,560 $1,900 $680
- If only one project can be chosen and if the discount rate is 12%, which project should be accepted? Why? (Use NPV for the analysis.)
- Crispen Corporation can invest in a project that costs $400,000. The project is expected to have an after-tax return of $250,000 in each of years 1 and 2. Crispen normally uses a 10 percent discount rate to evaluate projects but feels it should use 12 per
- A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: 1.) What is the NPV of the project if the required return is 11 percent? 2.) At a required return of 11 percent, should the
- Net present value is calculated by: A. (Present value of project's future cash inflows) - (Present value of the project's cost) B. (Present value of the project's cost) - (Present value of project's future cash inflows) C. (Present value of the project) -
- For the project shown in the following table calculate the internal rate of return (IRR). (Round to two decimal places.) The project's IRR is _____ %. Initial investment $110,000 Year Cash flows 1 $4
- What effect does an increased discount rate have on project evaluations? 1. Increases net cash flow 2.Decreases net cash flow 3. Increases the probability that a project will be accepted 4. It has no effect on project evaluation
- What is the discounted payback period of a project with initial outlay of $60,000 and cash inflows of $30,000 over the first three years of the project and $20,000 over the following three years of the project and a cost of capital of 10%?
- Which of the following cash flows should be used in an NPV calculation to determine which project to pursue? 1) The cash inflows expected as a result of the project. 2) Recurring cash flows from ongoing current operations. 3) Investment needed to be ma
- A project that provides annual cash flows of $17,600 for nine years costs $82,000 today. a. What is the NPV for the project if the required return is 8 percent? b. What is the NPV for the project if the required return is 20 percent? c. At what discoun
- A firm has two mutually exclusive investment projects to evaluate. The projects have the following cash flows: Time Cash Flow X Cash Flow Y 0 -$90,000 -$75,000 1 35,000 30,000 2 60,000 30,000 3 70,000 30,000 4 - 30,000 5 - 10,000 Projects X and Y are equa
- Hyde Inc. is comparing several alternative capital budgeting projects as shown below. Projects A B C Initial Investment $110,000 $90,000 $50,000 Present value of cash inflows $100,000 $100,000 $60,000 Using the profitability index, rank the projects, star
- _____ measure all expected future cash inflows and outflows of a project discounted back to the present point in time. a) Net present value b) Internal rate of return c) Income tax d) Discounted cash flow methods e) Payback period
- Fine Oak Woodworks is considering a project that has cash flows of $6,000, $4,000, and $3,000 for the next three years. If the appropriate discount rate of this project is 10 percent, which of the following statements is true? a. The current value of the
- Cannonier, Inc., has identified an investment project with the following cash flows. Year Cash flow 1 $930 2 1,160 3 1,380 4 2,120 a. If the discount rate is 7 percent, what is the future value of these cash flows in Year 4? (Do not round intermediate cal
- The IRR of normal Project X is greater than the IRR of normal Project Y, and both IRRs are greater than zero. Also, the NPV of X is greater than the NPV of Y at the cost of capital. If the two projects are mutually exclusive, Project X should definitely b
- A project that costs $4,900 to install will provide annual cash flows of $1,650 for each of the next 6 years. A. Calculate the NPV if the discount rate is 14%. B. Is this project worth pursuing? C. How high can the discount rate be before you would reject
- Waste Industries is evaluating a $55,500 project with the following cash flows. Years Cash Flows 1 $9,120 2 20,200 3 26,600 4 16,300 5 26,300 The coefficient of variation for the project is .475. Coefficient of Variation Discount Rate
- An investment project has the following cash flow: C 0 = $80,000 C 1 = $60,000 I 2 = $50,000 I 3 = $50,000 I 4 = $50,000 I 5 = $50,000 I 6 = $50,000 0 1 2 3 4 5 6 C: Cost I: Income Cons
- A project has a 7 year life and costs $400,000. Depreciation is straight line to zero over the life of the project and there is no salvage value. The tax rate is 30% and a 12% return on this project. Sales are expected to be 75,000 units per year. If the
- An all-equity firm is considering the projects shown below. The T-bill rate is 6 percent and the market risk premium is 6 percent. PROJECT EXPECTED RETURN BETA A 11% 0.8 B 21 1.5 C 15 1.7 D 19 1.9 a. Calculate the project-specific benchmarks for each pro
- A company that is using the internal rate of return (IRR) to evaluate projects should accept a project if the IRR: a. is greater than the project's net present value. b. equates the present value of the project's cash inflows with the present value of the
- Project L costs $44, 964.46, its expected cash flows are $10,000 per year for 9 years, and its WACC is 10%. What is the project's IRR?
- An investment project has the following cash flows: CF0 = -1,000,000; C01 - C08 = 200,000 each. If the required rate of return is 12%, what decision should be made using NPV? How would the IRR decisio
- Compute the annual rate of return for each project. Rank the projects based on the computed value. Which project do you recommend?
- Investment Required Net Present Value Life of Project in Years Initial Rate of Return Project A $160,000 $44,323 7 18% Project B $135,000 $42,000 12 16% Project C $100,000 $35,035 7 20% Project D $175,000 $38,136 3 22% Project profitability index for each
- Small Co. is considering the following project, whose cost of capital is 12% per annum: Year 0 1 2 3 Cash flows of the project (2,000) 1,000 800 700 Calculate the NPV of the project.
- Elite Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows: Each project requires an investment of $900,000. A rate of 15% has been selected for the net present value analysis. 1. Compute the
- Project 1, 2, 3 with lives of 5 years are being considered with cash flow estimated to be as follows Project 1(k$) Project 2(k$) Project 3(k$) Investment 70,000 40,000 100,000 Annual Revenue 25,000 1
Explore our homework questions and answers library
Browse
by subject