You and a coworker are analyzing two proposed capital investments with the following cash flows: Year...

 

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You and a coworker are analyzing two proposed capital investments with the following cash flows: Year Project A Project B 0 -17,000 -40,000 1 12,000 10,000 2 5,000 10,000 3 5,000 10,000 4 2,000 28,000 The cost of capital for both projects is 10 percent. a. Calculate the profitability index (PI) for each project. b. Your coworker looks at your analysis and says "Let's recommend the project with the highest PI." If you have unlimited funds to invest, do you agree or disagree with your coworker? Explain why you agree or disagree? Assume that you have no other resource constraints and that you do not have to consider future investments. c. If the projects are mutually exclusive, which of the two projects do you recommend? Explain your reasoning. You and a coworker are analyzing two proposed capital investments with the following cash flows: Year Project A Project B 0 -17,000 -40,000 1 12,000 10,000 2 5,000 10,000 3 5,000 10,000 4 2,000 28,000 The cost of capital for both projects is 10 percent. a. Calculate the profitability index (PI) for each project. b. Your coworker looks at your analysis and says "Let's recommend the project with the highest PI." If you have unlimited funds to invest, do you agree or disagree with your coworker? Explain why you agree or disagree? Assume that you have no other resource constraints and that you do not have to consider future investments. c. If the projects are mutually exclusive, which of the two projects do you recommend? Explain your reasoning.

Answer rating: 100% (QA)

a To calculate the Profitability Index PI for each project you can use the following formula PI Pres... View the full answer