IRR, NPV, and Profitability Index. Consider two projects that your company is evaluating. Project A has cash flows of -25, +11, +12, and +10 at time-zero, one year from now, two years from now, and three years from now, respectively. Project B has cash flows of -50, +22.5, +21.5, and +20.5 at time-zero, one year from now, two years from now, and three years from now, respectively. For the risk of these projects, the appropriate discount rate is 10%.

What is the NPV and IRR of each project?

What is the Profitability Index (PI) of each project, where the appropriate discount rate (the cost of capital) is 10%? If you firm is subject to limited capital to invest (capital rationing), what does your PI suggest about which project you would likely prefer?

Now, alternatively, assume that these two projects are mutually exclusive such that your company can choose only one of the two projects. Should your company choose Project A or Project B?