Question

Garrison Company has two investment opportunities. A cash flow schedule for the investments is provided below:

Year Investment A Investment B
0 $(4,700 ) $(5,550 )
1 1,880 2,820
2 1,880 1,880
3 1,880 1,880
4 1,880 940

Considering the unequal investments, which of the following techniques would be most appropriate for choosing between Investment A and Investment B?

a. Payback technique
b. Present value index
c. Net present value technique
d. None of these answers is correct.

Answer 1

b. Present Value Index

Step-by-step explanation:

Present Value Index (PVI) is the ratio of net present value of a project, to the initial outlay needed for it. Net Present value (NPV) refers to expected income inflow from a project in different time periods, adjusted to discount rate between the current & further time period.

So, to compare 2 investment projects, investment A & investment B: It needs to compute NPV of expected inflows - per unit investment expenditure, i.e PVI. The investment option having higher Present Value Index [PVI], i.e net present value per unit investment expenditure, should be chosen.