Question

The Gomez corp is considering two projects, T and V. The following info has been gathered on these projects:

.........................................................T.............................V
Initial invest............................$112,500..................$75,000
Present val of future inflows.$168,000................$107,000
Useful life..............................10 years..................10 years

Based on this info, which of the following statements are true?
1)Project T has the highest ranking according to the project profitability index critera
2)Project V has the highest ranking according to the net present value criteria

A) 1
B) 2
C) 1 & 2
D) none

Answer 1

Project T has a higher project profitability index and net present value compared to Project V, meaning it ranks highest according to both financial measures, making statement (C) 1 & 2 true.

Step-by-step explanation:

The question asks to compare two projects, T and V, based on the initial investment, the present value of future inflows, and their useful lives, to determine which project ranks higher according to two different financial measures: the project profitability index and the net present value criteria.

To calculate the project profitability index (PI), we divide the present value of future cash inflows by the initial investment. The PI for Project T is calculated as $168,000 / $112,500 = 1.4933. For Project V, the calculation is $107,000 / $75,000 = 1.4267. This means that Project T has the highest ranking according to the project profitability index criteria, since its PI is higher.

The net present value (NPV) is found by subtracting the initial investment from the present value of cash inflows. NPV for Project T is $168,000 - $112,500 = $55,500. NPV for Project V is $107,000 - $75,000 = $32,000. Therefore, Project T also has the highest NPV, which means it is the preferred project according to the net present value criteria too.

Based on these calculations, the statement that is true is (C) 1 & 2, meaning both projects rank highest according to their respective financial measure.