You are considering two independent projects both of which have been assigned a discount rate of 8 percent.Project A costs $13,100 and produces cash flows of $5,300 a year for three years.Project B costs $21,900 and produces cash flows of $12,000 a year for two years.Based on the profitability index,what is your recommendation concerning these projects?
A)You should accept both projects since both of their PIs are positive.
B)You should accept Project B because it has the lower PI.
C)You should reject both projects since both of their PIs are greater than 1.
D)You should accept project A because its PI exceeds 1.
E)You can accept either A or B,but not both.

Question

Quizplus · Accepted Answer

PI_A = ($5,300/1.08 + $5,300/1.08² + $5,300/1.08³)= 1.04;AcceptPI_B = ($12,000/1.08 + $12,000/1.08²)/$21,900 = .98;Reject

You Are Considering Two Independent Projects Both of Which Have