The Robb Computer Corporation is trying to choose between the following two mutually exclusive design projects:
Year Cash Flow (1) Cash Flow (2)
0 -$40,000 -$15,000
1 21,000 8,500
2 21,000 8,500
3 21,000 8,500
a. If the required rate of return is 10 percent and Robb Computer applies the profitability index decision rule, which project should the firm accept?
b. If the company applies the NPV decision rule, which project should it take?
c. Explain why your answer in (a) and (b) are different.