# Net Present Value and Profitability Index

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?

© BrainMass Inc. brainmass.com June 3, 2020, 11:50 pm ad1c9bdddfhttps://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.