Evaluate the following three projects, using the profitability index. Assume a cost of capital of 15 percent.
|
|
Project
|
|
Cash Flows
|
Liquidate
|
Recondition
|
Replace
|
|
Initial Cash Outflow
|
-$ 100,000
|
-$ 500,000
|
-$ 1,000,000
|
|
Year 1 Cash inflow
|
50,000
|
100,000
|
500,000
|
|
Year 2 Cash inflow
|
60,000
|
200,000
|
500,000
|
|
Year 3 Cash inflow
|
75,000
|
250,000
|
500,000
|
a. Rank these projects by their PIs.
b. If the projects are independent, which would you accept according to the PI criterion?
c. If these projects are mutually exclusive, which would you accept according to the PI criterion
d. Apply the NPV criterion to the projects, rank them according to their NPVs, and indicate which you would accept if they are independent and mutually exclusive.
e. Compare and contrast your answer from part (c) with your answer to part (d) for the mutually exclusive case. Explain this result.