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.

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.

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