Question

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

Year		Project X		Project Y
0		- $20,000		- $20,000
1		13,730		6,470
2		6,060		6,470
3		6,460		6,470
4		2,120		6,470

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 enter the profitability index for project X rounded to 4 decimal places   and the PI for project Y is enter the profitability index for project Y rounded to 4 decimal places .

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

If you have unlimited funds you should invest in select a project                                                          project Yneither projectproject Xboth projects.

Which project should be accepted if they are mutually exclusive?

If they are mutually exclusive you should invest in select a project                                                          Project Yneither projectProject X.

Answer 1

Ans 1
	Year	Project X	Project Y	PVIF @ 10%	Present value X	Present value Y
	1	13,730	6,470	0.909090909	12,481.82	5,881.82
	2	6,060	6,470	0.826446281	5,008.26	5,347.11
	3	6,460	6,470	0.751314801	4,853.49	4,861.01
	4	2,120	6,470	0.683013455	1,447.99	4,419.10
a	Present value of inflow		23,791.56	20,509.03
b	Initial investment			20000	20000
c=a/b	Profitability index			1.1896	1.0255
	Ans =	PI of X		1.1896
		PI of Y		1.0255
Ans 2	Which project, or projects, should be accepted if you have unlimited funds to invest
	we will select both the project
Ans 3	Which project should be accepted if they are mutually exclusive?
	we will select project X as it has higher PI and NPV