Problem 24-4B Applying net present value and profitability index P3

Milan Co. is considering two alternative investment projects. Each requires a $300,000 initial investment. Project A is expected to generate net cash flows of $90,000 per year over the next five years. Project B is expected to generate net cash flows of $80,000 per year over the next six years. Management requires an 8% rate of return on its investments.

Required

1. Compute each projects net present value.

2. Compute each projects profitability index.

3. If the company can choose only one project, which will it choose, based on profitability index?