The following are the cash flows of two projects: Year Project A Project B 0 %u2

Question

The following are the cash flows of two projects:
Year Project A Project B 0 %u2212$350        %u2212$350        1 180        250        2 180        250        3 180        250        4 180       
a. If the opportunity cost of capital is 11%, what is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 4 decimal places.)
  Project Profitability Index    A       B      
b. Does the profitability index rank the projects correctly? Yes No The following are the cash flows of two projects:

Explanation / Answer

for project A ...

NPV = -350 + 180 / 1.11 + 180/1.11^2 + 180/1.11^3 + 180/1.11^4 = 208.44

profitability index = 208.44 / 350 = 0.5955

for project B

NPV = -350 + 250/1.11 + 250 / 1.11^2 + 250 / 1.11 ^ 3 = 260.92867

Profitabiiyu inde x = 260.92867 / 350 = 0.7455

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