Evaluate the following three projects, using the profitability index. Assume a cost of capital of 15%.

a. Rank these projects by their PIs.
b. If the projects are independent, which would you accept according to the PI criterion?
c. If these projects are mutually exclusive, which would you accept according to the PI criterion?
d. Apply the NPV criterion to the projects, rank them according to their NPVs, and indicate which project you would accept if they are independent and if they are mutually exclusive.
e. Compare and contrast your answer to part (c) to your answer to part (d) for the mutually exclusive case. Explain this result.

Transcribed Image Text:

Project Liquidate S100,000 50,000 60.000 75,000 Recondition S500.000 100,000 200,000 250,000 Replace Initial cash outflow Year 1 cash inflow Year 2 cash inflow Year 3 cash inflow -$1,000,000 500,000 500,000 500,000