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Books .l LTE 11:05 AM @ 43%O Consider the following projects: Cash Flows (S) Project CO CID-10,500 21,000 E-20,500 35,875 Ass
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Answer #1
Part A Profitability index
Particulars Project D Project E
Co -10500 -20500
C1 21000 35785
Opportunity cost of capital 10% 10%
PV factor 0.909 0.909
PV of future cash flows 19089 32528.565
Profitability index =19089/10500 =32528.57/20500
Profitability index                    1.82                          1.59
Part B Incremental cash flows method
Particulars Project D Project E
Co -10500 -20500
C1 21000 35785
Opportunity cost of capital 10% 10%
PV factor 0.909 0.909
PV of future cash flows 19089 32528.565
Incremental cash flows 8589 12028.565
Profitability index =8589/10500 =12028.565/20500
Profitability index                    0.82                          0.59
Part b2
Since the profitability index of project of D is higher hence the project D should be chosen due to higher profitability index
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