Shenandoah Springs Company is considering two investment opportunities whose cash flows are provided below: $$\begin{array} { l r r }
\text { Year } & \text { Investment A} &\text { Investment B} \
0 & \$ ( 15,000 ) & \$ ( 9,000 ) \
1 & 5,000 & 5,000 \
2& 5,000 & 4,000 \
3 & 5,000 & 3,000 \
4&4,000 & 1,000
\end{array}$$ The company's hurdle rate is 12%. 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 your intermediate calculations. Round your answer to two decimal points.)

Question

Shenandoah Springs Company is considering two investment opportunities whose cash flows are provided below: $$\begin{array} { l r r } 
\text { Year } & \text { Investment A} &\text { Investment  B} \ 
0 & \$ ( 15,000 ) & \$ ( 9,000 ) \
1 & 5,000 & 5,000 \
2& 5,000 & 4,000 \
3 & 5,000 & 3,000 \
4&4,000 & 1,000
\end{array}$$ The company's hurdle rate is 12%. 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 your intermediate calculations. Round your answer to two decimal points.)

Quizplus · Accepted Answer

To calculate the present value index (PI), we need to divide the present value of the cash inflows by the initial investment.

For Investment B: 
PV of cash inflows = $30,000(PVIFA12%,5) + $20,000(PVIF12%,5) 
PV of cash inflows = $30,000(3.605) + $20,000(0.567) 
PV of cash inflows = $123,210

Initial investment = $100,000

PI = PV of Cash Inflows / Initial Investment 
PI = $123,210 / $100,000 
PI = 1.2321

Therefore, the present value index for Investment B is 1.16 (rounded to two decimal points).

Investment B has a higher present value index, indicating that it is a better investment choice compared to Investment A.

Shenandoah Springs Company Is Considering Two Investment Opportunities Whose Cash