In anticipation of the possible merger, APVAL PLC’s finance director wants to strengthen the company’s cash position. To facilitate this, he is rationing the funds available for investment in capital projects. Given below are the expected cash flows of four projects currently under consideration. Assume a 10% discount rate for all the projects.

(a) Use the PI to rank the four projects in descending preference order if the finance director imposes capital rationing only in the current year.

(b) Use the PIA to rank the four projects in descending preference order if the finance director expects capital rationing to extend beyond the current year.

(c) Explain why the two sets of ranks are different.

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Project End of year 0 1 2 3 4 5 A -63 B -107 128 C -52 D -77 2222 25 25 25 25 25 19 125 19 19 28 28 225 19 125 28 28