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# Cash flows and project comparisons

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You work for the 3T company, which expects to earn at least 18% on its investments. You have to choose between two similar projects. Below is the cash information for each project. Your analysts predict that the inflation rate will be a stable 3% over the next seven years. Which of the two projects would you fund if the decision is based solely on financial information? Why?

Omega Inflow Outflow Netflow
Year

Y0 \$0 \$225,000 -\$225,000

Y1 \$0 \$190,000 -\$190,000

Y2 \$150,000 \$0 \$150,000

Y3 \$220,000 \$30,000 \$190,000

Y4 \$215,000 \$0 \$215,000

Y5 \$205,000 \$30,000 \$175,000

Y6 \$197,000 \$0 \$197,000

Y7 \$100,000 \$30,000 \$70,000

Total \$1,087,000 \$505,000 \$582,000

Alpha Inflow Outflow Netflow
Year

Y0 \$0 \$300,000 -\$300,000

Y1 \$50,000 \$100,000 -\$50,000

Y2 \$150,000 \$0 \$150,000

Y3 \$250,000 \$50,000 \$200,000

Y4 \$250,000 \$0 \$250,000

Y5 \$200,000 \$50,000 \$150,000

Y6 \$180,000 \$0 \$180,000

Y7 \$120,000 \$30,000 \$90,000

Total \$1,200,000 \$530,000 \$670,000

#### Solution Summary

The solution explains how to determine which project should be taken up for funding

\$2.19

## Compare cash flows for two projects

The following are the cash flows of two projects:

Year Project A Project B
0 --\$400 --\$400
1 230 300
2 230 300
3 230 300
4 230

a. If the opportunity cost of capital is 10%, what is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 4 decimal places.)

Project Profitability Index
A =
B =

b. Does the profitability index rank the projects correctly?

Yes or No

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