Suppose the following two independent investment opportuniti

Suppose the following two independent investment opportunities are available to Greenplain, Inc. The appropriate discount rate is 10 percent.

Compute the profitability index for each of the two projects. (Do not round intermediate calculations. Round your answers to 3 decimal places. (e.g., 32.161))

Solution

PI = PV of Cash inflows/PV of cash outflows

a) PI(Alpha) = [ 1200/1.1 + 1100/1.1^2 + 900/1.1^3 ] / 2300 = 1.163

PI(Beta) = [ 800/1.1 + 2300/1.1^2 + 2900/1.1^3 ] / 3900 = 1.232

b)PI(Beta) > PI(Alpha). Hence accept Project Beta