Problem 12-19 Use of profitability index [LO12-4]

You are asked to evaluate the following two projects for the Norton corporation. Use a discount rate of 12 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

Project X (Videotapes of the Weather Report) ($36,000 Investment)						Project Y (Slow-Motion Replays of Commercials) ($56,000 Investment)
Year		Cash Flow				Year		Cash Flow
1		$	18,000			1		$	28,000
2			16,000			2			21,000
3			17,000			3			22,000
4			16,600			4			24,000

a. Calculate the profitability index for project X. (Do not round intermediate calculations and round your answer to 2 decimal places.)

b. Calculate the profitability index for project Y. (Do not round intermediate calculations and round your answer to 2 decimal places.)

c. Which project would you select based on the profitability index?

multiple choice

• Project X

• Project Y