1.You have a project with the following cash flow stream(assume a10%discount rate).What is the profitability index of the project?Is it acceptable?

Initial investment($76,000)

Year1$20,000

Year2$20,000

Year3$20,000

Year4$22,000

Year5$32,000

Disinvestment($4,000)at Year5

Part A:Calculate the profitability index for this project

Part B:Is the project favorable?Why or why not?

2.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?

3.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:

Year1:$15,000

Year2:$30,000

Year3:$45,000

Year4:$30,000

Year5:$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?

4.

ETP Co.has an investment opportunity costing$80,000that is expected to yield the following cash flows over the next ten years:

Year1:$15,000

Year2:$15,000

Year3:$15,000

Year4:$15,000

Year5:$15,000

Year6:$15,000

Year7:$13,000

Year8:$14,000

Year9:$16,000

Year10:$12,000

Part A:Find theNet Present Value(NPV)and Profitability Index(PI)of the investment at a discount rate of10%.

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 of1.85was also being considered,which project(ETP or X)would be best and WHY?