Question

You are considering the following two projects which are mutually exclusive. The required return on each project is 14%. Which project should you accept and what is the best reason for that decision?

O-NM Project A -$46,000 25,000 18,000 16,000 Project B -$46,000 11,000 19,000 32,000

Group of answer choices

Both Project A and B since they both have positive NPV

Project A, because it has the higher profitability index

Project A, because it has the higher net present value

Project B, because it has the higher net present value

Answer 1

cash flows YEAR wNEO Project A -$46,000 $25,000 $18,000 $16,000 Project B -$46,000 $11,000 $19,000 $32,000 pv @ 14% 1.0000 0.8772 0.7695 0.6750 NPV discounted cash flows Project A Project B -$46,000.00 -$46,000.00 $21,929.82 $9,649.12 $13,850.42 $14,619.88 $10,799.54 $21,599.09 $579.78 $131.91 Profitability index = 1 + NPV = initial investment = 1.013 1+(579.78/46000) 0.997 1+-131.91/46000) Project A, because it has the higher net present value