Question 2 [5 pts]

A firm is evaluating investment alternatives. Two projects are expected to generate cash flows at the end of each year, as summarized below:

Year	0	1	2	3
Project A	-21,700	11,200	11,200	11,200
Project B	-41,600	20,000	17,600	24,000

Suppose a firm must choose only one project (i.e., the two projects are mutually exclusive). Assume the required rate of return on both projects is equal to 12%. Answer questions (a) and (b) below.

A) If the profitability index was the firms decision rule, which project would be selected?

Answer (show the steps/calculation toward your results):

B) If the net present value (NPV) was the firms decision rule, which project would be selected?

Answer (show the steps/calculation toward your results):