Compare cash flows for two projects: What is the profitability index for each and are they ranked correctly?
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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
4 230
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
A =
B =
b. Does the profitability index rank the projects correctly?
Yes or No
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Solution Summary
In an attached Excel file, this solution calculates profitability index for each project and determines if the index ranks the projects correctly.
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