LP7.2 Financial Assignment: Profitability Index and NPV Problems..

LP7.2 Financial Assignment: Profitability Index and NPV Problems…

LP7.2 Financial Assignment: Profitability Index and NPV Problems

This assignment will assess the competency 6. Analyze operational and capital budgeting as means of risk analysis, tactical alternative analysis and forecasting.

NO EXCEL Submit assignment on Microsoft Word, Again no Excel program.

• REVIEW the Adobe Connect Financial Video on Profitability Index and NPV http://online.adobeconnect.com/p9layga97xm/ and the Profitability Index and NPV Transcript prior to completing the Assignment.

Directions: In a word document work out the financial problems below. To earn full credit you must show all your calculations. Please use a cover page including your name, date, instructor, and course.

1. Calculate the Profitability index of a capital project. The initial investment is \$250,000 for the purchase of some new radiology equipment. The new equipment will save the organization \$15,000 a year for the next 10 years. The project discount rate is 12%. (Use table 18-4 to determine the discount rate.)

• Determine the present value of the operating savings:

Present value of saving = savings per year X discounted rate

• Determine the net present value (NPV)

Pay close attention here, this is where basic mathematical functions need to follow financial accounting theory. Hence, if we have a positive value for the present value of savings, we cannot have a negative NPV. We started with an initial investment amount, so start there are subtract your net present value from that amount to determine your NPV.

NPV=present value of savings – initial investment

• Determine the profitability index

Profitability Index = NPV/initial investment

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LP7.2 Financial Assignment: Profitability Index and NPV Problems..