The financial manager of Levi Limited is considering borrowing R 840 million at an interest rate of 9% and considering two projects – Project A and Project B. The required rate of return for Levi Ltd’s equity is 12%, the prime rate is 8% and the inflation rate is 7%. The risk profiles of both projects are approximately the same as the company’s current risk profile, therefore the hurdle rate is also 12%.

Period	Project A (Rmn)	Project B (Rmn)
0	-840	-840
1	35	98
2	150	113
3	290	135
4	220	165
5	300	180
6	130	210
7	180	255
8	190	180
9		180
10		120

Assuming none of the projects can be replicated, what is the preferred project based on the Profitability Index?

Answer rating: 100% (QA)

The profitability index PI is calculated by dividing the present value of cash inflows by the initia... View the full answer