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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?

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    https://brainmass.com/business/capital-budgeting/profitability-index-versus-npv-compare-two-projects-205053

    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

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