Question

You are analyzing two proposed capital investments with the following cash flows: Year Project X Project Y 0 - $20,000 - $20,000 1 12,530 6,570 2 6,360 6,570 3 6,160 6,570 4 2,020 6,570 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 . Which project should be accepted if they are mutually exclusive? If they are mutually exclusive you should invest in .

Answer 1

Project X
Discount rate	0.1
Year	0	1	2	3	4
Cash flow stream	-20000	12530	6360	6160	2020
Discounting factor	1	1.1	1.21	1.331	1.4641
Discounted cash flows project	-20000	11390.91	5256.198	4628.099	1379.6872
NPV = Sum of discounted cash flows
NPV Project X =	2654.89
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
PI= (NPV+initial inv.)/initial inv.
=(2654.89+20000)/20000
1.13
Project Y
Discount rate	0.1
Year	0	1	2	3	4
Cash flow stream	-20000	6570	6570	6570	6570
Discounting factor	1	1.1	1.21	1.331	1.4641
Discounted cash flows project	-20000	5972.727	5429.752	4936.138	4487.3984
NPV = Sum of discounted cash flows
NPV Project Y =	826.02
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
PI= (NPV+initial inv.)/initial inv.
=(826.02+20000)/20000
1.04

When funds are unlimited choose both as both have PI more than 1

If mutually exclusive then choose project X as it has higher PI