Shenandoah Springs Company is considering two investment opportunities whose cash flows are provided below: $\begin{array}{|l|c|c|}
\hline \text { Year } & \text { Investment } A & \text { Investment B } \
\hline 0 & (\$ 15,000) & (\$ 9,000) \
\hline 1 & 5,000 & 5,000 \
\hline 2 & 5,000 & 4,000 \
\hline 3 & 5,000 & 3,000 \
\hline 4 & 4,000 & 1,000 \
\hline
\end{array}$ The company's hurdle rate is 12%.What is the present value index of Investment B? (Do not round your intermediate calculations.Round your answer to two decimal points. )

Question

Quizplus · Accepted Answer

To find the present value index (PVI) of Investment B, we need to calculate the present value of its cash flows using the company's hurdle rate of 12%. The present value of each cash flow is calculated as follows:

PV = CF / (1 + r)^n

where CF is the cash flow, r is the hurdle rate, and n is the year.

Using this formula, the present value of Investment B can be calculated as follows:

PV of B = (-9,000) + 5,000/(1.12) + 4,000/(1.12)^2 + 3,000/(1.12)^3 + 1,000/(1.12)^4

PV of B = (-9,000) + 4,462.05 + 3,392.35 + 2,493.20 + 622.47

PV of B = 1,969.07

The present value index (PVI) of Investment B is calculated as follows:

PVI = PV of B / Initial investment of B

PVI = 1,969.07 / 9,000

PVI = 0.22

Therefore, the present value index of Investment B is 0.22, which is less than 1. This means that Investment B is not a good investment and should be rejected. Investment A has a positive net present value and is the best choice.

Shenandoah Springs Company Is Considering Two Investment Opportunities Whose Cash