Juan is considering two independent projects.Project A costs $74,600 and has projected cash flows of $18,700,$46,300,and $12,200 for Years 1 to 3,respectively.Project B costs $70,000 and has cash flows of $10,600,$15,800,and $67,900 for Years 1 to 3,respectively.Juan assigns a discount rate of 10 percent to Project A and 12 percent to Project B.Which project or projects,if either,should he accept based on the profitability index rule?
A)Accept both projects.
B)Accept Project A and reject Project B.
C)Accept either A or B,but not both.
D)Reject both projects.
E)Accept Project B and reject Project A.

Question

Quizplus · Accepted Answer

The profitability index (PI) is calculated as the present value of future cash flows divided by the initial investment. For Project A, the PI is less than 1, while for Project B, the PI is greater than 1. Therefore, Juan should accept Project B and reject Project A.

Juan Is Considering Two Independent Projects