Question

Baird Company has a choice of two investment alternatives. The present value of cash inflows and outflows for the first alternative is $135,000 and $104,000, respectively. The present value of cash inflows and outflows for the second alternative is $310,000 and $267,500, respectively. Required Calculate the net present value of each investment opportunity. (Negative amounts should be indicated by a minus sign.) 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

Investment A:

NPV = $31,000

PVI = 1.298

Investment B:

NPV = $42,500

PVI = 1.1588

Investment A should produce a higher return as it has a higher present value index

Step-by-step explanation:

INVESTMENT A:

Present value of cash inflows = $135,000

Present value of cash outflows = $104,000

Net present value (NPV) = (present value of inflows - present value of outflows)

NPV = $135,000 - $104,000

NPV = $31,000

PRESENT VALUE INDEX(PVI) = (present value of cash inflow ÷ present value of cash outflow)

PVI = ($135,000/$104,000)

PVI = 1.298

INVESTMENT B:

INVESTMENT A:

Present value of cash inflows = $310,000

Present value of cash outflows = $267,500

Net present value (NPV) = (present value of inflows - present value of outflows)

NPV = $310,000 - $267,500

NPV = $42,500

PRESENT VALUE INDEX(PVI) = (present value of cash inflow ÷ present value of cash outflow)

PVI = ($310,000/$267,500)

PVI = 1.159