profitability index and npv sample

May 12th, 2015
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Problem : You want to endow a chair for a female professor of finance at your alma mater. You’d like to attract a prestigious faculty member, so you’d like the endowment to add $100,000 per year to the faculty member’s resources (salary, travel, databases, etc.) If you expect to earn a rate of return of 4% annually on the endowment, how much will you need to donate to fund the chair? Solution

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Exercises For Lecture 3ProblemYou want to endow a chair for a female professor of finance at your alma mater. You'd like to attract a prestigious faculty member, so you'd like the endowment to add $100,000 per year to the faculty member's resources (salary, travel, databases, etc.) If you expect to earn a rate of return of 4% annually on the endowment, how much will you need to donate to fund the chair? Solution This is a perpetuity of $100,000 per year. The funding you would need to give is the present value of that perpetuity. From the formula:You would need to donate $2.5 million to endow the chair.Problem Suppose your firm has the following five positive NPV projects to choose from. However, there is not enough manufacturing space in your plant to select all of the projects. Use profitability index to choose among the projects, given that you only have 100,000 square feet

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