1. Explain the differences and similarities between net present value (NPV) and the profitability index (PI).

2. You are analyzing a project and have prepared the following data:

Year Cash flow

0 $ -169,000

1 $ 46,200

2 $ 87,300

3 $ 41,000

4 $ 39,000

Required payback period 2.5 years Required return 8.50% Based on the net present value of this project, should you accept or reject the project?

3. Should financing costs be included as an incremental cash flow in capital budgeting analysis?

4. Explain the use of real and nominal discount rates in discounting cash flows. Which is used more often and why?