Question

Mason Company has a choice of two investment alternatives. The present value of cash inflows and outflows for the first alternative is $160,000 and $114,000, respectively. The present value of cash inflows and outflows for the second alternative is $335,000 and $280,000, 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

Answer:

The net present values of the two investments are $46000 and $55000 respectively .

However, the present value index for the first investment is 1.40 while the second investment has 1.2 as net present value index.

Judging from net present value,the the second investment is preferable,but since net present value is an absolute value,it does not  relate the net present value to the underlying outlay,the first investment is preferred based on present value of index 1.4

Explanation:

The net present value for both alternatives is shown below:

                                                         $                               $

Present value of cash inflows         160000                335000

Present value of cash inflows         (114000)               (280000)

Net present value                             46000                  55000

Present value index=present value of inflows/present value of outflows

First investment       =160000/114000=1.40

Second investment =335000/280000=1.2