Exercise 24-12 Net present value, profitability index LO P3 Following is information on two alternative investments being considered by Tiger Co. The company requires an 8% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Project x1 Project x2 Initial investment $(108,000) $(176,000) Expected net cash flows in year: 39,000 81,000 49,500 71,000 74,500 61,000 1 2 3 a. Compute each project's net present value. b. Compute each project's profitability index. If the company can choose only one project, which should it choose? Compute each project's net present value. Net Cash Flows Present Value of 1 at 8% Present Value of Net Cash Flows Project X 1 Year 1 IS 38, 114 X Year 2 $ 39,000 49,500 74,500 $ 163,000 0.9260 0.8570 X 0.7940 X 42,422 X 59,153 Year 3 Totals $ 137,689 (108,000) IS 29,689 Amount invested Net present value Project X2 Year 1 0.9280 IS 75,000 X Year 2 $ 81,000 71.000 61,000 $ 213,000 0.8570 0.7940 60.847 X 48,434 X Year 3 Totals $ 184,287 (178,000) Amount invested Net present value IS 8,287 Compute each project's profitability index. If the company can choose only one project, which should it choose? = Profitability Index Choose Numerator: Choose Denominator: Present value of net cash flows Initial investment Project $ 137,689 % $ 108,000 X1 Project IS X2 184,287 X 1 IS 176.000 If the company can choose only one project, which should it choose? Profitability Index Profitability index 1.27 1.05 Project X1