You and a coworker are analyzing two proposed capital investments with the following cash flows:

The cost of capital for both projects is 10 percent.

a. Calculate the profitability index (PI) for each project.

b. Your coworker looks at your analysis and says “Let’s recommend the project with the highest PI.” If you have unlimited funds to invest, do you agree or disagree with your coworker?
Explain why you agree or disagree? Assume that you have no other resource constraints and that you do not have to consider future investments.

c. If the projects are mutually exclusive, which of the two projects do you recommend? Explain your reasoning.

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Year Project A Project B 0 -17,000 -40,000 1 12,000 10,000 2 5,000 10,000 34 5,000 10,000 4 2,000 28,000