Consider two projects, A and B. The present value (PV) of after-tax cash inflows for project A is $55,000, while the original investment outlay for this project is $50,000. Project B, on the other hand, has the following characteristics: PV of after-tax cash inflows = $24,000; original investment outlay = $20,000. Assume that these two projects are mutually exclusive and that the company has adequate capital to fund either investment option. All the following statements are true except:
A) The NPV of Project A is $5,000.
B) The IRR of Project A is greater than the cost of capital (discount rate).
C) The profitability index (PI) for Project A is 1:1.
D) Project A is preferable to Project B (all else held constant).
E) The economic rate of return on Project A exceeds the discount rate.

Question

Quizplus · Accepted Answer

The profitability index (PI) for Project A is calculated as the present value of after-tax cash inflows divided by the original investment outlay, which is $55,000 / $50,000 = 1.1, not 1:1.

Consider Two Projects, a and B