Net Present Value versus Profitability Index Consider the following two mutually exclusive projects available to Global Investments, Inc.:

C0 C1 C2 Profitability Index NPV A 2$1,000 $1,000 $500 1.32 $322 B 2500 500 400 1.57 285 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 ?