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    Net Present Value and Profitability Index

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    A firm is considering two capital investment projects. Project A involves an initial cost of $125,000. The discounted present value of all future cash flows is $145,000. Project B requires an initial expenditure of $85,000. The discounted present value of all future cash flows is $102,000.

    (i) Calculate the net present value of each of the two projects. Which would be preferred according to the net present value criterion?

    (ii) Calculate the profitability index of each of the two projects. Which would be preferred according to the profitability index criterion?

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    https://brainmass.com/economics/investments/net-present-value-profitability-index-301838

    Solution Preview

    (1) NPV

    Project A = -$125.000 + $145,000 = $20,000

    Project B = -$85,000 + $102,000 = $17,000

    Both the projects have ...

    Solution Summary

    The net present value and profitability index is calculated. A complete, neat and step-by-step solution is provided.

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