Project A costs $47,800 with cash inflows of $34,200 in Year 1 and $28,700 in Year 2. Project B costs $63,200 with cash inflows of $21,900 in Year 1 and $59,200 in Year 2. These projects are independent and have an assigned discount rate of 15 percent. Based on the profitability index, what is your recommendation concerning these projects?
A) Accept both projects
B) Reject both projects
C) Accept Project A and reject Project B
D) Accept Project B and reject Project A
E) Accept either, but not both projects

Question

Project A costs $47,800 with cash inflows of $34,200 in Year 1 and $28,700 in Year 2. Project B costs $63,200 with cash inflows of $21,900 in Year 1 and $59,200 in Year 2. These projects are independent and have an assigned discount rate of 15 percent. Based on the profitability index, what is your recommendation concerning these projects?
A) Accept both projects
B) Reject both projects
C) Accept Project A and reject Project B
D) Accept Project B and reject Project A 
E) Accept either, but not both projects

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. For both projects, the PI is greater than 1, indicating that both should be accepted.

Project a Costs $47,800 with Cash Inflows of $34,200 in Year