Question 2

a) An enterprise is conducting an investment assessment and has calculated the following net present values (NPV), ie. present value future cash flows including the basic investment, for the three alternatives being evaluated: alternative 1 with NPV = SEK 100,000 where the basic investment amounts to SEK 45,000, alternative 2 with NPV = SEK -15,000 where the basic investment amounts to SEK 25,000 alternative 3 with NPV = SEK 150,000 where the basic investment amounts to SEK 75,000. The company wants to supplement its data by calculating profitability per invested krona via Profitability Index (PI). Calculate the Profitability Index (PI) and rank the machines via PI and NPV respectively. Comment on your documentation / calculations.

b) Discuss differences and similarities between the PI and NPV methods and the advantages and disadvantages of each method in light of the above situation.