Following is information on two alternative investments being considered by Tiger Co. The company requires a 15% return from its investments. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.) Project X1Project X2
Initial investment$ (98,000 )$ (144,000 )
Expected net cash flows in:
Year 136,00076,500
Year 246,50066,500
Year 371,50056,500
a. Compute each project's net present value.
b. Compute each project's profitability index. If the company can choose only one project, which should it choose?

X1 NPV = $15,477.44

X2 NPV = $9,954.96

X1 PI = 1.16

X2 P2 = 1.07

X1 should be chosen

Explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

NPV can be calculated using a financial calculator  

X1

Cash flow in year 0 = -98,000

Cash flow in year 1 = 36,000

Cash flow in year 2 = 46,500

Cash flow in year 3 =  71,500

I = 15%

NPV = 15,477.44

X2

Cash flow in year 0 = (144,000 )

Cash flow in year 1 = 76,500

Cash flow in year 2 = 66,500

Cash flow in year 3 = 56,500

I = 15%

NPV = 9954.96

profitability index = 1 + (NPV / Initial investment)

X1 - 1 + (15,477.44 / 98,000) = 1.16

X2 - 1 + (9954.96 / 144,000) = 1.07

X1 should be chosen because it has a higher NPV. this means that the project is more profitable than X2

To determine NPV using a financial calculator take the following steps:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute