Section C: Long Exercises (20 Marks)
CI: Evaluate the following projects, using the profitability index. Assume a cost of capital of
12%.
[SK1: 10 marks]
Initial Cash Outflow
Year 1 Cash flow
Year 2 Cash flow
Year 3 Cash flow
Project M
Project N
-$195,000
-$375,000
17,250
240,000
95,250
142,500
142,500
112,500
a. What is the profitability index for each project? (6 marks)
b. If the projects are independent, which would you accept according to the profitability index
criterion? (2 mark)
c. If these projects are mutually exclusive, which would you accept according to the PI
criterion? (2 mark)