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# Profitability Index versus NPV.

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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 higher NPV if the discount rate is 10 percent?
b. Which has the higher profitability index?
c. Which project is most attractive to a firm that can raise an unlimited amount of funds to pay
for its investment projects? Which project is most attractive to a firm that is limited in the
funds it can raise?

#### Solution Preview

Profitability Index Versus NPV.
Consider these two projects

Project A: C0= -\$36, C1= +\$20, C2= +\$20, C3= +\$20

Project B: C0= -\$50, C1= +\$25, C2= +\$25, C3= +\$25

a. Which project has the higher NVP if the discount rate is 10%?

NPV is calculated by finding the present value of each cash flow, including both cash inflows and outflows, discounted at the project's cost of ...

#### Solution Summary

This solution is comprised of a detailed explanation to answer:

a. Which project has the higher NPV if the discount rate is 10 percent?
b. Which has the higher profitability index?
c. Which project is most attractive to a firm that can raise an unlimited amount of funds to pay
for its investment projects? Which project is most attractive to a firm that is limited in the
funds it can raise?

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