Question

Profitability index. Given the discount rate and the future cash flow of each project listed in the following​ table, use the PI to determine which projects the company should accept.

What is the PI of project​ A?

What is the PI of Project B?  

Cash Flow	Project A		Project B
Year 0	−​$2,000,000		−​$2,300,000
Year 1	​$600,000		​$1,150,000
Year 2	​$700,000		​$1,050,000
Year 3	​$800,000		​$950,000
Year 4	​$900,000		​$850,000
Year 5	​$1,000,000		​$750,000
Discount rate	5​%		16​%

Answer 1

Answer: Choose Project A (with higher Profitability Index). Project A has 1.71 profitability index and Project B has 1.39 profitability index.