You are considering two independent projects both of which have been assigned a discount rate of 12 percent.Project A costs $39,100 and produces cash flows of $15,900 a year for 3 years.Project B costs $22,900 and produces cash flows of $14,000 a year for 2 years.Based on the profitability index,what is your recommendation concerning these projects?
A)Accept both projects
B)Accept Project B because it has the lower PI
C)Accept Project A because it has the lower PI
D)Accept Project A and reject Project B
E)Reject Project A and accept Project B

Question

Quizplus · Accepted Answer

PI_A = ($15,900 / 1.12 + $15,900 / 1.12² + $15,900 / 1.12³)/ $39,100 = .98;Reject PI_B = ($14,000 / 1.12 + $14,000 / 1.12²)/ $22,900 = 1.03;Accept

You Are Considering Two Independent Projects Both of Which Have