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Net present value and the profitability index

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Screening and Ranking Alternatives

Sunshine Corporation is considering several long-term investments. Management wants to accept the two best projects, given the following data:

Project

A B C D E

Present value of

net cash inflows . . . . . . . . $24,000 $44,000 $15,000 $30,000 $50,000

Investment cost . . . . . . .. . 20,000 40,000 16,000 24,000 41,000

Required:

1. Determine the net present value and the profitability index for each project.

2. Which projects are acceptable using the profitability index as a screening tool?

Should We Purchase That New Copier? Campus Print Shop is thinking of purchasing a new, modern copier that automatically collates pages. The machine would cost $22,000 cash. A service contract on the machine, considered a must because of its complexity, would be an additional $200 per month. The machine is expected to last eight years and have a resale value of $4,000. By purchasing the new machine, Campus would save $450 per month in labor costs and $100 per month in materials costs due to increased efficiency. Other operating costs are expected to remain the same. The old copier would be sold for its scrap value of $1,000.

Campus requires a return of 14% on its capital investments.
1. As a consultant to Campus, compute:
a. The payback period

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Solution Preview

Screening and Ranking Alternatives

Sunshine Corporation is considering several long-term investments. Management wants to accept the two best projects, given the following data:

Project

A B C D E

Present value of ...

Solution Summary

This discusses the steps to compute the net present value and the profitability index for each project

$2.19
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Net Present Value and Profitability Index

Lebar Company is considering two mutually exclusive investment alternatives. Lebar has a 10% cost of capital. Following is the cash flow information for the two alternatives (see attached):

Compute the net present value for each alternative and determine which alternative is more desirable using the net value criterion.

Compute the profitability index for each alternative and determine which alternative is more desirable using
the profitability index criterion.

Why do the rankings differ under the two alternatives? Which alternative would you recommend?

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