Suppose the following two independent investment opportunities are available to Relax, Inc. The appropriate discount rate is 11 percent.
| Year |
Project Alpha |
Project Beta |
| 0 |
-$3,100 |
-$4,700 |
| 1 |
1,600 |
1,000 |
| 2 |
1,500 |
3,100 |
| 3 |
1,100 |
3,300 |
|
a. Compute the profitability index for each of the two projects. (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)
Profitability Index
Project Alpha
Project Beta
b. Which project should the company accept based on the profitability index rule?
Project Beta
Project Alpha