Problem 5-8 Calculating Profitability Index Suppose the following two independen

ID: 2632640 • Letter: P

Question

Problem 5-8 Calculating Profitability Index

Suppose the following two independent investment opportunities are available to Greenplain, Inc. The appropriate discount rate is 15 percent.

Requirement1: Compute the profitability index for each of the two projects. (Round your answers to 3 decimal places. (e.g., 32.161))

Profitability index

Project Alpha Project Beta

Requirement2: Which project(s) should Greenplain accept based on the profitability index rule?

Project Alpha or Project Beta

Year Project Alpha Project Beta 0 $ -1,520 $ -2,640 1 830 580 2 910 1,870 3 810 2,130

PV of cash flows of Alpha

= 830/1.15 + 910/1.15^2 + 810/1.15^3

= 1942.41801594

profitibility index = 1942.41801594 / 1520 = 1.278

PV of cash flows of beta

= 580/1.15 + 1870/1.15^2 + 2130/1.15^3

=3318.84605901

profitibility index = 3318.84605901/2640

= 1.257

hence choose project alpha

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