1. Calculating Profitability Index. Suppose the following two independent investment opportunities are available to Fitz, Inc. The appropriate discount rate is 8.5 percent.

Year	Project Alpha	Project Beta
0	-$2700	-$4100
1	1500	900
2	1300	2600
3	1100	3200

a. Compute the profitability index for each of the two projects.

b. Which project(s) should the company accept based on the profitability index rule?

2. Problems with Profitability Index. Coris Sausage Corporation is trying to choose between the following two mutually exclusive design projects:

Year	Project I	Project II
0	-$45000	-$19800
1	23200	11700
2	23200	11700
3	23200	11700

a. If the required return is 10 percent and the company applies the profitability index decision rule, which project should the firm accept?

b. If the company applies the NPV decision rule, which project should it take?

c. Explain why your answers in (a) and (b) are different.

3. Comparing Investment Criteria. Wii Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not both. Consider the following cash flows of the two mutually exclusive projects for the company. Assume the discount rate for both projects is 10 percent.

Year	Board Game	DVD
0	-$850	-$1700
1	670	1300
2	510	750
3	90	350

a. Based on the payback period rule, which project should be chosen?

b. Based on the NPV, which project should be chosen? c. Based on the IRR, which project should be chosen? d. Based on the incremental IRR, which project should be chosen?