Net Present Value versus Profitability Index

Consider the following two mutually exclusive projects available to Global Investments, Inc.:

The appropriate discount rate for the projects is 10 percent. Global Investments chose to undertake Project A. At a luncheon for shareholders, the manager of a pension fund that owns a substantial amount of the firms stock asks you why the firm chose Project A instead of Project B when Project B has a higher profitability index. How would you, the CFO, justify your firms action? Are there any circumstances under which Global Investments should choose Project B?

l ,000 $I,000 $500 500 500 400 Profitability Index I.32 1.57 NPV $322 285