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Project A Year 0- -$110 Year 1- $45 Year 2- $45 Year 3- $45 Year 4- $45 Project B Year 0- -$110 Year 1- $55 Year 2- $55 Year 3- $55 Year 4- $55 If the opportunity cost of capital is 11%, what is the profitability index for each project? Does the profitability index rank the projects A and B correctly?
Project A
Year 0- -$110
Year 1- $45
Year 2- $45
Year 3- $45
Year 4- $45
Project B
Year 0- -$110
Year 1- $55
Year 2- $55
Year 3- $55
Year 4- $55
If the opportunity cost of capital is 11%, what is the profitability index for each project?
Does the profitability index rank the projects A and B correctly?
Expert Solution
Profitability index for project A = 1.27
Profitability index for project B = 1.55
Yes, the profitability index rank the projects A and B correctly because the NPV of project B ($60.63) is higher than the project A ($29.61)
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