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1. You have a project with the following cash flow stream(assume a10% discount rate). What is the profitability index of the project? Is it acceptable?

Initial investment (\$76,000)

Year 1 \$20,000

Year 2 \$20,000

Year 3 \$20,000

Year 4 \$22,000

Year 5 \$32,000

Disinvestment (\$4,000) at Year 5

Part A: Calculate the profitability index for this project

Part B: Is the project favorable? Why or why not?

2. An investment opportunity costing \$85,000 is expected to yield net cash flows of \$15,000 annually over six years.

Part A: Calculate the Net Present Value of the investment at a discount rate of 12%.

Part B: Does the capital expenditure appears to be a favorable investment? Why or Why not?

3. Smith Company has an investment opportunity to purchase a new machine costing \$75,000 that is expected to yield the following net cash flows over the next five years:

Year 1: \$15,000

Year 2: \$30,000

Year 3: \$45,000

Year 4: \$30,000

Year 5: \$15,000

In year 5, Smith Company can get salvage value on the machine 5,000. Find the NPV of the investment at a discount rate of 10%. Should you accept this project? Why or why not?

4.

ETP Co. has an investment opportunity costing \$80,000 that is expected to yield the following cash flows over the next ten years:

Year 1: \$15,000

Year 2: \$15,000

Year 3: \$15,000

Year 4: \$15,000

Year 5: \$15,000

Year 6: \$15,000

Year 7: \$13,000

Year 8: \$14,000

Year 9: \$16,000

Year 10: \$12,000

Part A:Find the Net Present Value (NPV) and Profitability Index (PI) of the investment at a discount rate of 10%.

Part B:Does this capital project appear to be a favorable investment?Why or Why not?

Part C:If a second project (X) with a profitability index of 1.85 was also being considered, which project (ETP or X) would be best and WHY?