## Question

###### Question 15 answered a. If the company requires a 12 percent return on its investments, should...

Question 15 answered

a. If the company requires a 12 percent return on its investments, should it accept this project? Why? b. Compute the IRR for this project. How many IRRs are there? Using the IRR decision rule, should the company accept the project? What's going on here? 5. Calculating Profitability Index (LO7) What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent? Year Cash Flow -S14,000 7.300 6,900 5,700 Click here for a description of Table: Questions and Problems 15. N w 6. Problems with Profitability Index (L01, 7) The Hazeldean Computer Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (1) Cash Flow (II)

## Answers

Solution:

Computation of Profitability indexDiscount rate 10%Discount rate 15%Discount rate 22%ParticularsPeriodAmountPV FactorPresent ValuePV FactorPresent ValuePV FactorPresent ValueCash outflows:Initial investment 0 $14,000.00 1 $14,000 1 $14,000 1 $14,000 Present Value of Cash outflows (A)$14,000$14,000$14,000Cash InflowsYear 1 1 $7,300.00 0.90909 $6,636 0.86957 $6,348 0.81967 $5,984 Year 2 2 $6,900.00 0.82645 $5,702 0.75614 $5,217 0.67186 $4,636 Year 3 3 $5,700.00 0.75131 $4,282 0.65752 $3,748 0.55071 $3,139 Present Value of Cash Inflows (B)$16,621$15,313$13,758Net Present Value (NPV) (B-A)$2,621$1,313-$242Profitability index (NPV / Initial investment)0.190.09-0.02

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