Suppose the following two independent investment opportunities are available to Relax, Inc. The appropriate discount rate is

Question:

Suppose the following two independent investment opportunities are available to Relax, Inc. The appropriate discount rate is 8.5 percent.

Year ....................Project Alpha ..............Project Beta

0 .................................−$2,100 ...................−$3,700

1 .....................................1,200........................ 800

2 .....................................1,100 .......................2,300

3 .......................................900 .......................2,900

a. Compute the profitability index for each of the two projects.

b. Which project(s) should the company accept based on the profitability index rule?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...