Profitability Index versus NPV. Consider these two projects:
Project C0 C1 C2 C3
A -$36 +$20 +$20 +$20
B - 50 + 25 + 25 + 25
a. Which project has the highest NPV if the discount rare is 10%?
b. Which has the higher profitability index?
c. Which project is most attractive to a firm that can raise a unlimited amount of funds to pay for investment project?
d. Which project is most attract to a firm that limited in the funds it can raise?
a. NPV is calculated as Sum (PV of inflows) - initial investment
The NPV for Project A is
-36 + 20/1.1 + 20/1.1^2 + 20/1.1^3 = $13.74
The NPV for Project B is
-50 + 25/1.1 + 25/1.1^2 + 25/1.1^3 = $12.17
At a discount rate of 10%, Project A has a ...
The solution explains how to calculate the profitability index and NPV and decide about project attractiveness