Net Present Value versus Profitability Index Consider the following two mutually exclusive projects available to Global Investments, Inc.:
| C0 | C1 | C2 | Profitability Index | NPV |
A | ‒$1,000 | $1,000 | $500 | 1.32 | $322 |
B | ‒500 | 500 | 400 | 1.57 | 285 |
The appropriate discount rate for the projects is 10 percent. Global Investments chose to undertake project A. At a luncheon for shareholders, the manager of a pension fund that owns a substantial amount of the firm’s stock asks you why the firm chose project A instead of project B when project B has a higher profitability index.
How would you, the CFO, justify your firm’s action? Are there any circumstances under which Global Investments should choose project B?
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