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Dahlia Manufacturing has the following two possible projects. The required return is 12 percent. Year Project Y Project Z 0 - $31,000 - $60,000 1 - 14,000 - 24,000 2 - 12,400 - 23,000 3 - 14,800 - 22,000 4 - 10,400 - 21,000Required: (a) What is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 3 decimal places. Profitability index Project Y Project Z (b) What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places. NPV Project Y $ Project Z $ (c) Which, if either, of the projects should the company accept?

Respuesta :

Answer:

The profitability index for each project is given below

Project X 1.275

Project Y 1.146

The NPV of the two projects is as follows:

Project X NPV=$8528.940

Project Y NPV=$8769.076

Based on profitability index project, X has a higher profitability index of 1.275

While looking at the projects from NPV's point of view,project Y should be considered as it has higher NPV of $8769.076 ,$240.136  higher than the NPV of X.

Find detailed computation in the attached spreadsheet.

Explanation:

The formula for calculating profitability index is given below:

Profitability index = 1+NPV/Capital Investment

For instance,project X profitability index=1+8528.940 /31000

                                                                    =1.275

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