The management of Integrated Manufacturing (IM) is considering two capital budgeting projects: Projects E and F. Estimates of the projects free cash flow streams appear below. Management requires a 15% annual rate of return on projects like these. Management also wants projects to earn back their initial cash costs within 2 years.

Project Year	0	1	2	3	4
Project E	$500k	$175k	$225k	$300k	$375k
Project F	$5,000k	$1,500k	$1,750k	$2,250k	$2,750k

Suppose management is interested in Project E alone. (Project F is irrelevant.)

7. Using the payback (PB) rule, management should

a. reject the project because the PB period is 2 1/3 years which is less than 2 years.

b. accept the project because the PB period is 2 1/3 years which is less than 2 years.

c. accept the project because the PB period is 3 years which is greater than 2 years.

d. reject the project because the PB period is 3 years which is greater than 2 years.

8. Using the profitability index (PI) rule, management should

a. reject the project because PI = 0.41 < 1.

b. accept the project because PI = 1.47 > 0.

c. accept the project because PI = 1.47 > 1.

d. accept the project because PI = 2.15 > 0.