Question
Company GGG is evaluating two investment projects. Project A has an initial investment of $200,000 and is expected to generate cash flows of $50,000 per
Company GGG is evaluating two investment projects. Project A has an initial investment of $200,000 and is expected to generate cash flows of $50,000 per year for 4 years. Project B has an initial investment of $250,000 and is expected to generate cash flows of $70,000 per year for 5 years. Which project should the company choose based on the profitability index (PI) method, assuming a discount rate of 8%? Explain the profitability index (PI) as a capital budgeting technique used to evaluate investment projects based on their profitability relative to their initial investment cost. Discuss the advantages and limitations of the profitability index method in investment decision-making and project selection.
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