You are analyzing two proposed capital investments with the following cash flows

Question

You are analyzing two proposed capital investments with the following cash flows: Year Project X Project Y 0 - $20,000 - $20,000 1 11,830 6,370 2 5,460 6,370 3 5,460 6,370 4 1,820 6,370 The cost of capital for both projects is 10 percent. Calculate the profitability index (PI) for each project. (Do not round discount factors. Round intermediate calculations to 2 decimal places, e.g. 15.25 and final answer to 4 decimal places, e.g. 1.2527.)

The PI for project X is and the PI for project Y is?

Which project, or projects, should be accepted if you have unlimited funds to invest?

If you have unlimited funds you should invest in (neither project, project Y, project X, or both projects)?

Which project should be accepted if they are mutually exclusive?

If they are mutually exclusive you should invest in (Project X, Project Y, or neither project)?

Explanation / Answer

PI for X = 1.03

PI for Y = 1.01

if unlimited funds, choose both X and Y

If mutually exclusive choose X

10.00% Cash flows Year Discounted CF          (20,000.00) 0 -20000.00            11,830.00 1 10754.55               5,460.00 2 4512.40               5,460.00 3 4102.18               1,820.00 4 1243.08

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