Question: 1. Jester Company is considering two alternative projects. Project 1 requires an initial investment of $500,000 and has a net present value of cash flows of $1,200,000. Project 2 requires an initial investment of $3,500,000 and has a net present value of cash flows of $1,900,000. Compute the profitability index for each project. Based on the profitability index, which project should the company prefer? Explain.
2. Under what conditions is a sunk cost relevant to decision making?