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The treasurer of Tropical Fruits, Inc., has projected the cash flows of Projects A, B, and C

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The treasurer of Tropical Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows:

PROJECT A PROJECT C YEAR PROJECT B -$200,000 135,000 135,000 -$200,000 140,000 -$350,000 240,000 240,000 125,000

Suppose the relevant discount rate is 12 percent per year.
a. Compute the profitability index for each of the three projects.
b. Compute the NPV for each of the three projects.
c. Suppose these three projects are independent. Which project(s) should the company accept based on the profitability index rule?
d. Suppose these three projects are mutually exclusive. Which project(s) should the company accept based on the profitability index rule?
e. Suppose the budget for these projects is $550,000. The projects are not divisible. Which project(s) should be accepted?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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PROJECT A PROJECT C YEAR PROJECT B -$200,000 135,000 135,000 -$200,000 140,000 -$350,000 240,000 240,000 125,000

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a The profitability index is the PV of the future cash flows divided by the initial investment The p...View the full answer


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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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