Q1. You have a project with the following cash flow stream (assume a 10% discount rate). What is the profitability index of the project? Is it acceptable?
Initial investment ($76,000)
Year 1 $20,000
Year 2 $20,000
Year 3 $20,000
Year 4 $22,000
Year 5 $32,000
Disinvestment ($4,000) at Year 5
Part A: Calculate the profitability index for this project
Part B: Is the project favorable? Why or why not?
Q2. An investment opportunity costing $85,000 is expected to yield net cash flows of $15,000 annually over six years.
Part A: Calculate the Net Present Value of the investment at a discount rate of 12%.
Part B: Does the capital expenditure appears to be a favorable investment? Why or Why not?
Q3. Smith Company has an investment opportunity to purchase a new machine costing $75,000 that is expected to yield the following net cash flows over the next five years:
Year 1: $15,000
Year 2: $30,000
Year 3: $45,000
Year 4: $30,000
Year 5: $15,000
In year 5, Smith Company can get salvage value on the machine 5,000. Find the NPV of the investment at a discount rate of 10%. Should you accept this project? Why or why not?
Q4. ETP Co. has an investment opportunity costing $80,000 that is expected to yield the following cash flows over the next ten years:
Year 1: $15,000
Year 2: $15,000
Year 3: $15,000
Year 4: $15,000
Year 5: $15,000
Year 6: $15,000
Year 7: $13,000
Year 8: $14,000
Year 9: $16,000
Year 10: $12,000
Part A: Find the Net Present Value (NPV) and Profitability Index (PI) of the investment at a discount rate of 10%.
Part B: Does this capital project appear to be a favorable investment? Why or Why not?
Part C: If a second project (X) with a profitability index of 1.85 was also being considered, which project (ETP or X) would be best and WHY?