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Project selection

You are asked to evaluate two projects for Adventures Club, Inc. Using the net present value method combined with the profitability index approach whereas

profitability index = present value of the inflows divided by Present value of the outflows.
Discount rate is 12%

Which would be best to select? Project X or Project Y?
Why?

Project X (trips to Disneyland) Project Y (International film festivals)
(\$10,000 investment) (\$22,000 investment)

Year Cash Flow Year Cash Flow
1 \$4,000 1 \$10,800
2 5,000 2 9,800
3 4,200 3 6,000
4 3,600 4 7,000

Solution Preview

We calculate the NPV and the profitability index
NPV = PV of cash flows - initial investment
Project X
PV of cash flows = 4,000/1.12 + 5,000/1.12^2 + 4,200/1.12^3 + 3,600/1.12^4 = 12,834.74
Initial investment = 10,000
NPV = 12,834.74 - 10,000= 2,834.74
Profitability index (PI) = present value of the ...

Solution Summary

The solution explains project selection using net present value method combined with the profitability index approach

\$2.19