You are considering two independent projects both of which have been assigned a discount rate of 8% .Based on the profitability index,what is your recommendation concerning these projects?
$$\begin{array} { | l | l | l | }
\hline \text { Year } & \text { Project A } & \text { Project } \mathbf { B } \
\hline 0 & \text { -£38,500 } & -£42,000 \
\hline 1 & £20,000 &£ 10,000 \
\hline 2 & £24,000 & £ 40,000 \
\hline
\end{array}$$
A)You should accept both projects since both of their PIs are positive.
B)You should accept project A since it has the higher PI.
C)You should accept both projects since both of their PIs are greater than 1.
D)You should only accept project B since it has the largest PI and the PI exceeds 1.
E)Neither project is acceptable.

Question

You are considering two independent projects both of which have been assigned a discount rate of 8% .Based on the profitability index,what is your recommendation concerning these projects?
$$\begin{array} { | l | l | l | } 
\hline \text { Year } & \text { Project A } & \text { Project } \mathbf { B } \
\hline 0 & \text { -£38,500 } & -£42,000 \
\hline 1 & £20,000 &£ 10,000 \
\hline 2 & £24,000 & £ 40,000 \
\hline
\end{array}$$
A)You should accept both projects since both of their PIs are positive.
B)You should accept project A since it has the higher PI.
C)You should accept both projects since both of their PIs are greater than 1.
D)You should only accept project B since it has the largest PI and the PI exceeds 1.
E)Neither project is acceptable.

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. Both projects have a PI greater than 1, indicating they are acceptable.

You Are Considering Two Independent Projects Both of Which Have