Asked by Elena Franco on Jun 15, 2024
Verified
A company is considering two projects,Project A and Project B.The following information is available for each project:
Calculate the profitability index for each project.Based on the profitability index,which project,if any,should the company pursue and why?
Profitability Index
A calculation that measures the relative profitability of an investment by dividing the present value of its future cash flows by the initial investment cost.
- Recognize and delineate various methods of capital budgeting such as Net Present Value, Internal Rate of Return, Payback Period, and Profitability Index.
- Conduct analyses and comprehend the outcomes of different financial planning methods for capital.
- Implement capital budgeting methods in real-life contexts to arrive at well-informed decisions.
Verified Answer
DP
Darryl PerkinsJun 22, 2024
Final Answer : 
Since a higher profitability index suggests a more desirable project,Project A should be selected.Note:
A profitability index less than 1.0 indicates an investment with a negative net present value.In making capital investment decisions,we should invest if the NPV is positive; we should not invest if the NPV is negative.Since Project A is above 1.0,it should be selected.
Since a higher profitability index suggests a more desirable project,Project A should be selected.Note:A profitability index less than 1.0 indicates an investment with a negative net present value.In making capital investment decisions,we should invest if the NPV is positive; we should not invest if the NPV is negative.Since Project A is above 1.0,it should be selected.
Learning Objectives
- Recognize and delineate various methods of capital budgeting such as Net Present Value, Internal Rate of Return, Payback Period, and Profitability Index.
- Conduct analyses and comprehend the outcomes of different financial planning methods for capital.
- Implement capital budgeting methods in real-life contexts to arrive at well-informed decisions.