A firm is considering two capital investment projects. Project A involves an initial cost of $125,000. The

Question:

A firm is considering two capital investment projects. Project A involves an initial cost of $125,000. The discounted present value of all future cash flows is $145,000. Project B requires an initial expenditure of $85,000. The discounted present value of all future cash flows is $102,000.
(i) Calculate the of each of the two projects. Which would be preferred according to the criterion?
(ii) Calculate the profitability index of each of the two projects. Which would be preferred according to the profitability index criterion?

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...