The treasurer of Banila co. has projected the cash flows of Project A, B, and C as
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Question:
The treasurer of Banila co. has projected the cash flows of Project A, B, and C as follows:
| Year | Project A | Project B | Project C |
| 1 | -$405,000 | -$810,000 | -$405,000 |
| 2 | 297,000 | 540,000 | 324,000 |
| 3 | 297,000 | 540,000 | 243,000 |
Suppose the relevant discount rate is 12% per year.
i. Suppose these three projects are mutually exclusive. Which project(s) should Banila Co. accept based on the profitability index rule? Consider also the incremental cash flows of the project when the scales of the projects are different.
v. Suppose the company’s budget for these projects is $810,000. The projects are not divisible. Which project(s) should Banila Co. accept?
Expert Answer:
Answer Lets start with the calculation of the profitability index for each project using the relevan... View the full answer
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