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Consider two projects that are expected to generate cash flows at the end of each year as follows: Year 0 1 2 Project A

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Consider two projects that are expected to generate cash flows at the end of each year as follows: Year 0 1 2 Project A -5,400,000 5,000,000 5,000,000 3 5,000,000 Project B -3,600,000 3,450,000 3,967,500 4,562,625 You must choose only one project over the other (ie., the two projects are mutually exclusive). Assume that the required rate of return on both projects is 15%. Answer questions a) and b) below. a) [10 marks] Calculate the Profitability Index (PI) of each project and determine which project should be selected if the decision is based on the Pl.

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