Question - Choose one of the projects whose cash flows are listed below needs to be made. Assume that projects have the same risk.
Project A Project B
Now -R 16,000 -R 3,200
End-of-year 1 R 10,500 R 3,300
End-of-year 2 R 9,100 R 1,260
End-of-year 3 R 3,000 R 600
Required:
Calculate the net present value (NPV) and the profitability index (PI) for the two projects. Assume a 10 per cent discount rate.
Which of the projects is better according to each of the two methods?
What is the explanation for the differences in rankings between the NPV and PI methods of analysis?
Which method is correct? Why?