Consider the following projects Cash Flows 5 10900 20900 Pr

Consider the following projects: Cash Flows (5) ?? -10,900 -20,900 Project 21,800 36,575 Assume that the projects are mutually exclusive and that the a. Calculate the profitability index for each project (Do not ro Project Profitability Index b-1. Caiculate the profitability-index using the incremental cash f Profitability-inde b-2. Which project should you choose?

Solution

Profitability Index = Present Value of Inflow / Present value of Outflows

Project D

Present Value of Inflow =21800

Present value of Outflows = 10900

Profitability Index = 21800/10900 = 2

Project E

Present Value of Inflow =36575

Present value of Outflows = 20900

Profitability Index = 21800/10900 = 1.75