Question: Evaluate the following projects, using the profitability index. Assume a cost of capital of 12%. Project S Project T Initial Cash Outflow -$390,000 -$750,000 Year

Evaluate the following projects, using the profitability index. Assume a cost of capital of 12%.

Project S

Project T

Initial Cash Outflow

-$390,000

-$750,000

Year 1 Cash flow

34,500

480,000

Year 2 Cash flow

190,500

285,000

Year 3 Cash flow

285,000

225,000

Required:

a.

What is the profitability index for each project? (3 marks)

b.

If the projects are independent, which would you accept according to the profitability index criterion? (1 mark)

c.

If these projects are mutually exclusive, which would you accept according to the PI criterion? (1 mark)

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