Answer Happy

Melanie Inc. has been feeling the pinch of the market over the past couple of years. The company is building a strategy to get back on track and provide some return to shareholders. Right now Melanie is looking into three different investment opportunities and has come to you to provide your opinion on which is best. Her discount rate is 12%. The first investment is a pitch from Brandon to invest in his newest genius online gaming idea. It will require the least upfront investment of the three. The second is from Natasha and Terri-lynn, they just want to make raising kids a little easier and have a great pitch for a "how-to" program complete with books and videos and advice from experts. It will cost a lot though to get these materials marketable. Finally Jeremy wants to partner on opening a new consulting business. He see demand for financial planning and internal analysis - the market is huge right now (and he knows Melanie hates that stuff) but he just doesn't have the resources to do it on his own. The following information has given: Brandon The Girls Jeremy Investment $205,000 $470,000 $420,000 Annual Cash inflows $160,000 $142,000 $205,000 $109,000 $ 38,000 $ 89,000 Annual Expenses (each project includes $4,000 depreciation) Salvage Value (at the end of its life) $0 $20,000 $60,000 Life of investment 7 years 8 years 5 years Required rate of return 12% 12% 12% NPV $46,000 $74,500 $46,600 IRR 19% 16% 13% Required: a. Compute each project profitability index b. Which project would you recommend to management based on the above information and your calculations? Why?