Suppose your firm is considering two
mutually exclusive, required projects with the cash flows shown below. The
required rate of return on projects of both of their risk class is 8 percent,
and that the maximum allowable payback and discounted payback statistic for the
projects are 2 and 3 years, respectively.
TIME: 0 1 2 3 Project A CF: $ – 10,000 $ 10,000 $
30,000 $ 3,000 Project B CF: $ – 30,000 $ 10,000 $ 20,000 $ 50,000
Use the Profitability Index (PI) decision rule to
evaluate these projects; what is the PI for each project, and which one(s)
should it be accepted or rejected?