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    Important Information About Profitability Index

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    Consider the following projects:

    Project Co C1 C2
    A -$2,000 +$2,000 +$1,200
    B -$2,000 +$1,440 +$1,728

    a. Calculate the profitability index for A and B assuming a 22% opportunity cost of capital
    b. Use the profitability index rule to determine which project(s) you should accept if you could undertake both and if you could undertake only one (which one?)

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    Solution Summary

    The solution calculates Profitability Index for two projects and determines which project should be accepted if only one can be undertaken.