# Two projects, Project A and Project B, are available, each costing $500,000. The discount rate is...

## Question:

Two projects, Project A and Project B, are available, each costing $500,000. The discount rate is 10%. Considering the cash flows given below, which project would be more profitable using the profitability index?

Year | Project A | Project B |

1 | 150,000 | 50,000 |

2 | 200,000 | 150,000 |

3 | 250,000 | 200,000 |

4 | 150,000 | 300,000 |

5 | 100,000 | 200,000 |

## Profitability Index:

The profitability index technique helps identify the more profitable project. The profitability index ratio uses the present value of cash inflows and investment cost in its calculations.

## Answer and Explanation: 1

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View this answerLet's compute the profitability index for Projects A ad B to determine the most profitable project.

** Profitability index for Project A:**

Year | Cash... |

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Chapter 14 / Lesson 5The profitability index method measures the acceptability of a project through the ratio of the projected cash inflow to the initial investment. Learn about the definition and calculation of profitability index and understand how to interpret its results.

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