Question
Option 1: Initial expenditures Year 1 Year 2 Year 3 Year 4 Year 5 Net cost $300,000 Additional revenue $43,000 76,800 112,300 225,000 168,750 Additional
Option 1:
Initial expenditures Year 1 Year 2 Year 3 Year 4 Year 5
Net cost $300,000
Additional revenue $43,000 76,800 112,300 225,000 168,750
Additional operating costs 11,250 11,250 11,250 11,250 11,250
Amortization 45,000 66,000 63,000 63,000 63,000
Net increase in income (13,250) (450) 38,050 150,750 94,500
Option 2:
Initial expenditures Year 1 Year 2 Year 3 Year 4 Year 5
Net cost $510,000
Additional revenue $382,500 325,125 89,250 76,500 51,000
Additional operating costs 19,125 19,125 25,500 31,875 38,250
Amortization 76,500 112,200 107,100 107,100 107,100
Net increase in income 286,875 193,800 (43,350) (62,475) (94,350)
How do you calculate the profitability index of these two project options?
WACC is 9.79%, corporate tax rate is 20% and flotation cost before tax is 2.50.
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