Reference: 10-09
Lambert Manufacturing Has $120,000 to Invest in Either

Reference: 10-09
Lambert Manufacturing has $120,000 to invest in either Project A or Project B. The following data are available on these projects: $$\begin{array} { | l | l | l | } \hline & \text { Project A } & \text { Project } B \\\hline \text { Cost of equipment needed now } & \$ 120,000 & \$ 70,000 \\\hline \text { Working capital investment needed now } & - & \$ 50,000 \\\hline \text { Annual net operating cash inflows } & \$ 50,000 & \$ 45,000 \\\hline \text { Salvage value of equipment in 6 years } & \$ 15,000 & - \\\hline\end{array}$$ Both projects have a useful life of 6 years. At the end of 6 years, the working capital investment will be released for use elsewhere. Lambert's discount rate is 14%.
-Perkins Company is considering several investment proposals, as shown below: $$\begin{array} { | l | l | l | l | l | } \hline& { \text { Investment Proposal } } \\\hline & A & B & C & D \\\hline \text { Investment required } & \$ 80,000 & \$ 100,000 & \$ 60,000 & \$ 75,000 \\\hline \text { Present value of future net cash flows } & \$ 96,000 & \$ 150,000 & \$ 84,000 & \$ 120,000 \\\hline\end{array}$$ In what order do the proposals rank in terms of preference using the profitability index?

A) A, C, B, D
B) B, D, C, A
C) D, B, C, A
D) B, D, A, C

Correct Answer:

Verified

Unlock this answer now
Get Access to more Verified Answers free of charge

Access For Free