Consider the following two mutually exclusive projects available to Global Investments, Inc.: The appropriate discount rate for

Question:

Consider the following two mutually exclusive projects available to Global Investments, Inc.:

The appropriate discount rate for the projects is 10 percent. Global Investments chose to undertake Project A. At a luncheon for shareholders, the manager of a pension fund that owns a substantial amount of the firm€™s stock asks you why the firm chose Project A instead of Project B when Project B has a higher profitability index. How would you, the CFO, justify your firm€™s action? Are there any circumstances under which Global Investments should choose Project B?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...