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Problems with Profitability Index The Romo Corporation is trying to choose between the following two mutually exclusive design projects:

Year Cash Flow (I) Cash Flow (II)
0 -40,000 -21,000
1 20,000 11,000
2 20,000 11,000
3 20,000 11,000

a. If the required return is 10 percent and the company applies the profitability index decision rule, which project should the firm accept?
b. If the company applies the NPV decision rule, which project should it choose?
c. Explain why your answers in (a) and (b) are different.

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Solution Summary

The solution explains project selection based on profitability index and NPV.

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