Question

Rolla Company has a choice of two investment alternatives. The present value of cash inflows and outflows for the first alternative is $125,000 and $100,000, respectively. The present value of cash inflows and outflows for the second alternative is $300,000 and $262,500, respectively.

Required

Calculate the net present value of each investment opportunity

Calculate the present value index for each investment opportunity. (Round "PVI" to 2 decimal places.)

Indicate which investment will produce the higher rate of return.

Answer 1

Alternative A will produce the best return.

It has a better present value index which means, the investment yield a better rate.

Step-by-step explanation:

ALTERNATIVE (a)

125,000 - 100,000 = 25,000 NPV

ALTERNATIVE (b)

300,000 - 262,500 = 37,500 NPV

`(CashFlows \: PV)/(initial \: investment) = PVI`

ALTERNATIVE (a)

125.000/100,000 = 1.25

ALTERNATIVE (b)

300,000/262,500 = 1.1429