The net present value for Proposals X and Y has been calculated on the basis of the data given below.
Proposal X
Proposal Y
Amount to be invested
$145,000
$280,000
Total present value of net cash flow
172,000
320,000
Net present value
27,000
40,000
Determine the present value index for each proposal.
Round your answers to two decimal places.

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andromache andromache · Answer 1 · 2020-09-18T02:48:05+02:00

Answer and Explanation:

The computation of the present value index for each proposal is shown below:

As we know that

NPV = Cash inflow Present Value - Cash outflow Present Value

That means

Present Value of future cash inflows = NPV + Present Value of Cash Outflow

For Proposal X ,

Future cash inflows Present Value = $172000 ($27,000 + $145,000)

And,

Future cash outflows Present Value = $145,000

So,

Present Value Index is

= $172000 ÷ $145,000

= 1.18

For Proposal Y ,

Future cash inflows Present Value = $320000 ($40,000 + $280,000)

Future cash outflows Present Value = $280,000

So,

Present Value Index is

= $172,000 ÷ $145,000

= 1.14

So proposal X is more profitable.