Question: 6. The net present value rule versus the profitability index rule. You must choose between the two projects whose cash flows are shown below.

6. The net present value rule versus the profitability index rule. You

6. The net present value rule versus the profitability index rule. You must choose between the two projects whose cash flows are shown below. Both projects are of equivalent risk. Year End Now 1 2 3 Project A -$16,000 Project B -$3,200 10,500 3,300 9,100 3,000 1,260 600 a. Compute the net present value (NPV) and the profitability index (PI) for the two projects. Assume a 10 percent discount rate. b. Which of the projects is better according to each of the two methods? C. What is the explanation for the differences in rankings between the NPV and PI methods of analysis? d. Which method is correct? Why?

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