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# Profitability Index versus NPV: Compare two projects

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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?

#### Solution Preview

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 ...

#### Solution Summary

The solution explains how to calculate the profitability index and NPV and decide about project attractiveness

\$2.19