RST Corporation is contemplating two capital investment projects, Project Red and Project Blue. Both projects...
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Accounting
RST Corporation is contemplating two capital investment projects, Project Red and Project Blue. Both projects require an initial outlay of USD 80,000. The expected annual cash inflows are:
Year | Cash Flows (Project Red) | Cash Flows (Project Blue) |
Initial Investment | (80,000) | (80,000) |
1 | 30,000 | 25,000 |
2 | 25,000 | 30,000 |
3 | 20,000 | 25,000 |
4 | 20,000 | 20,000 |
a. Determine the Profitability Index (PI) for each project if the cost of capital is 6%.
b. Based on the PI, which project should the company choose?
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