You are considering two independent projects, project A and project B. The initi

Question

You are considering two independent projects, project A and project B. The initial cash outlay associated with project A is $60, 000, and the initial cash outlay associated with project B is $80, 000. The required rate of return on both projects is 9 percent. The expected annual free cash inflows from each project are in the popup window: Calculate the NPV for each project and indicate if the project should be accepted. What is the PI of project A? What is the PI of project B? Based on the PI criterion, project A should be because its PI is than 1.00 and project B should be because its PI is than 1.00.

Explanation / Answer

PI = Present value of cash inflows / Initial cash outlay

Project A:

Present value of cash inflows = Annual cash inflows x PVIFA 9%, 6 years = $ 12,000 x 4.4859 = $ 53,831

PI = 53,831 / 60,000 = 0.90

Project B:

Present value of cash inflows = $ 13,000 x 4.4859 = $ 58,317

PI = 58,317 / 80,000 = 0.73

Project A should be rejected as its PI is less than 1, and Project B should also be rejected as its PI is also less than 1.

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