The Weiland Computer Corporation is trying to choose between the following mutually exclusive design projects, P1 and P2:
Year 0 1 2 3
Cash flows (P1) -$53,000 27,000 27,000 27,000
Cash flow (P2) -$16,000 9,100 9,100 9,100
a. If the discount rate is 10 percent and the company applies the profitability index (PI) decision rule, which project should the firm accept?
b. If the firm applies the Net Present Value (NPV) decision rule, which project should it take?
c. Are your answers in (a) and (b) different? Explain why?

a profitability index P1=1.27

profitability index P2= 1.41

b NPV P1 = $14145.01

NPV P2 = $6630.3

c YES ANSWERS ARE DIFFERENT due to fact that cash flows in P1 is higher than in P2

Step-by-step explanation:

profitability index or = present value of an investment cash flows=67145.01

benefit cost ratio                initial cost                                                  53000

For project 1 or P1                            

cost of capital 10 %                                                                        = 1.27

initial investment = $53,000 since year 0

Year   Cash flows (P1)$  present value of future cash flows PV

 1                  27,000                      24545.46

 2                 27,000                      22314.05

 3                 27,000                      20285.50

                                          Total = 67145.01

use the formula of  present value of future cash flows = C/(1+i)ⁿ

C = cash  = 27000

i = interest = 10%  = 10/ 100 = 0.1

n = year = 1

year 1 = 27000/(1+0.1)¹= 24545.46

year 2 = 27000/(1.1)²     =    22314.05                  note n = 2

year 3 = 27000(1.1)³     =      20285.50

Profitability index = 1.27 > 1 thus it should be accepted

profitability index or = present value of an investment cash flows=22630.30

benefit cost ratio                initial cost                                                  16000

For project 1 or P1                            

cost of capital 10 %                                                                            = 1.41

initial investment = $16,000 since year 0

Year   Cash flows (P2)$  present value of future cash flows PV

 1                  9,100                     8272.73

 2                 9,100                      7520.6

 3                 9,100                     6836.97

                                          Total = 22630.30

use the formula of  present value of future cash flows = C/(1+i)ⁿ

C = cash  = 9100

i = interest = 10%  = 10/ 100 = 0.1

n = year = 1

year 1 = 9100/(1+0.1)¹= 8272.73

year 2 = 9100/(1.1)²     =    7520.6                  note n = 2

year 3 = 9100(1.1)³     =      6836.97

Profitability index = 1.41 > 1 thus it should be accepted

Profitability index of P1 = 1.27 AND P2 1.41 SO Weiland Computer Corporation SHOULD TAKE P2

b Net Present Value (NPV) decision rule =∑ pv - initial investment required

P1 = 67145.01 - 53,000 = $14145.01

P2 = 22630.30 - 16000 = $6630.3

Weiland Computer should take P1 since P1  > P2 that is $14145.01 >$6630.3

C YES ANSWERS ARE DIFFERENT due to fact that cash flows in P1 is higher than in P2

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step-by-step explanation: