Problem:
Suppose your firm is considering two mutually exclusive, required projects with thecash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
|
Time
|
0
|
1
|
2
|
3
|
|
Project A CF
|
-$10,000
|
$10,000
|
$30,000
|
$3,000
|
|
Project B CF
|
$-30,000
|
$10,000
|
$20,000
|
$50,000
|
Requirement:
Question: Use the Profitability Index (PI) decision rule to evaluate these projects; what is the PI for each project, and which one(s) should it be accepted or rejected?
Note: Please show how to work it out.