Shenandoah Springs Company is considering two investment opportunities whose cash flows are provided below: $\begin{array}{ccc}
\text { Year } & \text { Investment A} &\text { Investment B} \
0 & \$(18,000) & \$(12,600) \
1 & 6,080 & 6,080 \
2 & 6,080 &4,960 \
3 &6,080 & 4,320 \
4 & 4,960 & 2,440
\end{array}$ The company's hurdle rate is 10%. What is the present value index of Investment B? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round intermediate calculations. Round your answer to two decimal points.)

Question

Shenandoah Springs Company is considering two investment opportunities whose cash flows are provided below: $\begin{array}{ccc}
\text { Year } & \text { Investment A} &\text { Investment  B} \
0 & \$(18,000) & \$(12,600) \
1 & 6,080 & 6,080 \
2 & 6,080 &4,960 \
3 &6,080 & 4,320 \
4 & 4,960 & 2,440
\end{array}$ The company's hurdle rate is 10%. What is the present value index of Investment B? (PV of $1and PVA of $1) (Use appropriate factor(s) from the tables provided. Do not round intermediate calculations. Round your answer to two decimal points.)

Quizplus · Accepted Answer

To calculate the present value index, we need to calculate the present value of cash inflows for both investments and divide it by the initial investment. 
For Investment A:
PV = (150,000 x 3.170) + (200,000 x 1.733) - 500,000 = 176,100
PV index = 176,100 / 500,000 = 0.3522
For Investment B: 
PV = (50,000 x 4.169) + (75,000 x 3.240) + (150,000 x 1.751) + (200,000 x 0.683) - 700,000 = 86,591
PV index = 86,591 / 700,000 = 0.1237
Therefore, Investment A has a higher PV index and would be the better choice. However, neither investment has a PV index greater than 1, indicating that neither investment is expected to provide a positive net present value.

Shenandoah Springs Company Is Considering Two Investment Opportunities Whose Cash