A firm is considering two capital investment projects. Project A involves an initial cost of $15,000. The discounted present value of all future cash flows is $18,000. Project B requires an initial expenditure of $25,000. The discounted present value of all future cash flows is $29,000.

(i) Net present value (NPV) = Initial cost  Discounted present value of future cash flows
NPV, Project A ($) =  15,000 + 18,000 = 3,000
NPV, Project B ($) =  25,000 + 29,000 = 4,000
Since Project B has higher NPV, this should be selected.
(ii) Profitability index (PI) = Discounted present value of future cash flows / Initial cost
PI, Project A = 18,000 / 15,000 = 1.20
PI, Project B = 29,000 / 25,000 = 1.16
Since Project B has higher PI, this should be selected.
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