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1. A rich, friendly, and probably slightly unbalanced benefactor offers you the opportunity to invest $1...

1. A rich, friendly, and probably slightly unbalanced benefactor offers you the

opportunity to invest $1 million in two mutually exclusive ways. The payoffs are:

a. $2 million after 1 year, a 100% return.

b. $300,000 a year forever.

Neither investment is risky, and safe securities are yielding 7%.

2. Your wacky benefactor (see above) now offers you the choice of two

opportunities:

a. Invest $1,000 today and quadruple your money—a 300% return—in 1 year with no risk.

b. Invest $1 million for 1 year at a guaranteed 50% return.

Question: Calculate the profitability indexes of the two pairs of mutually exclusive investments in 1 and 2 above. Use a 7% discount rate. Does the profitability index give the right ranking in each case?

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Answer #1

2 또 4.285 ( 1-0 ) 3:138 (J ) n eaoh case

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