Calculate the profitability index of each of the following series of cash flows and determine which is the better investment in terms of profitability.

Assume you only have $4,600 to spend, and you can only pick a single choice between these 2 project options.

Assume a cost of capital of 12%.

PROJECT 1:

• Year 0: -$4,600
• Year 1: $2,934
• Year 2: $432
• Year 3: $9
• Year 4: $3268

PROJECT 2:

• Year 0: -$4,600
• Year 1: $3,694
• Year 2: $234
• Year 3: $4,024
• Year 4: $65

a.

Project 1 is better, because its NPV is lower and its profitability index is higher.

b.

Project 2 is better, because its NPV is higher and its profitability index is higher.

c.

Project 1 and 2 are identical. I would be indifferent to either project.

d.

Project 2 is better, because its NPV is lower and its profitability index is lower.

e.

Project 1 is better, because its NPV is higher and profitability index is lower.