Comparing Investment Criteria The treasurer of Amaro Canned Fruits has projected the cash flows of projects A,
Question:
Comparing Investment Criteria The treasurer of Amaro Canned Fruits has projected the cash flows of projects A, B and C as follows.
Year Project A (€) Project B (€) Project C (€)
0 −100,000 −200,000 −100,000 1 70,000 130,000 75,000 2 70,000 130,000 60,000 Suppose the relevant discount rate is 12 per cent a 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 Amaro accept based on the profitability index rule?
(d) Suppose these three projects are mutually exclusive. Which project(s) should Amaro accept based on the profitability index rule?
(e) Suppose Amaro’s budget for these projects is €300,000. The projects are not divisible. Which project(s)
should Amaro accept?
(f) Suppose Amaro had a margin of safety of 10 per cent. Which project(s) should it accept?
Step by Step Answer: