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Profitability Index, Project Crossover Rate, Project Cash Flow

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1. You are considering two independent projects both of which have been assigned a discount rate of 8%. Based on the profitability index, what is your recommendation concerning these projects?

2. The Winston Co. is considering two mutually exclusive projects with the following cash flows. The incremental IRR is _____ and if the required rate is higher than the crossover rate then project _____ should be accepted.

3. Jeff's Stereo Sound is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing the floor inventory by $150,000 and increasing its debt to suppliers by 50% of that amount. The company will also spend $200,000 for a building contractor to expand the size of the showroom. As part of the expansion plan, the company will be offering credit to its customers and thus expects accounts receivable to rise by $25,000. For the project analysis, what amount should be used as the initial cash flow for net working capital?

4. Ralph and Emma's is considering a project with total sales of $17,500, total variable costs of $9,800, total fixed costs of $3,500, and estimated production of 400 units. The depreciation expense is $2,400 a year. What is the contribution margin per unit?

5. Eight months ago, you purchased 400 shares of Winston, Inc. stock at a price of $54.90 a share. The company pays quarterly dividends of $.50 a share. Today, you sold all of your shares for $49.30 a share. What is your total percentage return on this investment?

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Solution Summary

The solution determines the profitability index, project crossover rate, project cash flow, contribution margin and ROR.

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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