Question
Profitability index. Given the discount rate and the future cash flow of each project listed in the following table, use the PI to determine which
Profitability
index.
Given the discount rate and the future cash flow of each project listed in the following table, use the PI to determine which projects the company should accept.
| Cash Flow | Project A | Project B |
| ||
| Year 0 | $2,000,000 | $2,300,000 | |||
| Year 1 | $400,000 | $1,150,000 | |||
| Year 2 | $550,000 | $1,000,000 | |||
| Year 3 | $700,000 | $850,000 | |||
| Year 4 | $850,000 | $700,000 | |||
| Year 5 | $1,000,000 | $550,000 | |||
| Discount rate | 7% | 17% | |||
What is the PI of project A? (Round to two decimal places.)
Project A should be accepted or rejected?
What is the PI of project B? (Round to two decimal places.)
Project B should be accepted or rejected?
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Financial Modeling
Authors: Simon Benninga
4th Edition
0262027283, 9780262027281
