Problems with Profitability Index. the Matterhorn Corporation is trying to choose between the following two mutually exclusive design projects:
Year | Cash Flow (I) | Cash Flow (II) |
0 | −$72,000 | −$30,000 |
1 | 27,000 | 9,000 |
2 | 32,000 | 19,500 |
3 | 38,000 | 13,500 |
a. If the required return is 11 percent and the company applies the profitability index decision rule, which project should the firm accept?
b. If the company applies the NPV decision rule, which project should it take?
c. Explain why your answers in (a) and (b) are different.
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