NPV (Net Present Value) versus PI (Profitability Index) Consider the following two mutually exclusive projects available to Global Investments, Inc.: Projects C0 C1 C2 PI NPV A -$1000 $1000 $500 1.32 $322 B -500 500 400 1.57 285 The appropriate discount r
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NPV (Net Present Value) versus PI (Profitability Index)
Consider the following two mutually exclusive projects available to Global Investments, Inc.:
Projects | C0 | C1 | C2 | PI | NPV |
A | -$1000 | $1000 | $500 | 1.32 | $322 |
B | -500 | 500 | 400 | 1.57 | 285 |
The appropriate discount rate for the projects is 10%. 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 PI.
How would you, the CFO, justify your firm’s action? Are there any circumstances under which Global Investments should choose project B?
10 years ago
NPV (Net Present Value) versus PI (Profitability Index) Consider the following two mutually exclusive projects available to Global Investments, Inc.: Projects C0 C1 C2 PI NPV A -$1000 $1000 $500 1.32 $322 B -500 500 400 1.57 285 The appropriate discount r
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npv_vs_profitability.docx
