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Net present value and the profitability index

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

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