The project cash flows and NPVs for Projects A and B are provided in the table below. Which project has a higher profitability index? $$\begin{array} { | c | c | c | }
\hline & \text { Project A } & \text { Project B } \
\hline \text { Year 0 } & - \$ 1,900 & - \$ 2,000 \
\hline \text { Year 1 } & \$ 2,500 & \$ 1,550 \
\hline \text { Year 2 } & \$ 1,500 & \$ 1,900 \
\hline \text { NPV } & \$ 1,408.12 & \$ 784.50 \
\hline
\end{array}$$
A)Project A
B)Project B
C)The two projects have the same Profitability Index

Question

The project cash flows and NPVs for Projects A and B are provided in the table below. Which project has a higher profitability index? $$\begin{array} { | c | c | c | } 
\hline & \text { Project A } & \text { Project B } \
\hline \text { Year 0 } & - \$ 1,900 & - \$ 2,000 \
\hline \text { Year 1 } & \$ 2,500 & \$ 1,550 \
\hline \text { Year 2 } & \$ 1,500 & \$ 1,900 \
\hline \text { NPV } & \$ 1,408.12 & \$ 784.50 \
\hline
\end{array}$$
A)Project A
B)Project B
C)The two projects have the same Profitability Index

Quizplus · Accepted Answer

The Profitability Index (PI) is calculated as the present value of future cash flows divided by the initial investment. For Project A, the PI is $1,408.12/$1,900 = 0.741. For Project B, the PI is $784.50/$2,000 = 0.392. Therefore, Project A has a higher profitability index.

The Project Cash Flows and NPVs for Projects a and B