Using Profitability (PI) Index for Project screening
investments. Management wants to
accept the two best projects, given the following data:
Project
A B C D E
Present value of
net cash inflows . . . . . . . . $24,000 $44,000 $15,000
$30,000 $50,000
Investment cost . . . . . . . . . . 20,000 40,000 16,000
24,000 41,000
Required:
1. Determine the net present value and the profitability
index for each project.
2. Which projects are acceptable using the profitability
index as a screening tool?
3. What would be the ranking of the acceptable projects according
to the profitability indexes?
4. Interpretive Question: What additional information would
be needed to screen and rank
the projects using the internal rate of return method? What
are the decision rules using the
IRR method for screening and ranking capital budgeting
projects?
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