The following are the cash flows of two projects:
Year Project A Project B
0 --$400 --$400
1 230 300
2 230 300
3 230 300
a. If the opportunity cost of capital is 10%, what is the profitability index for each project? (Do not round intermediate calculations. Round your answers to 4 decimal places.)
Project Profitability Index
b. Does the profitability index rank the projects correctly?
Yes or No
In an attached Excel file, this solution calculates profitability index for each project and determines if the index ranks the projects correctly.