If the required return is 10 percent and Robb Computer applies the profitability index decision…

Problems with Profitability Index – The Robb Computer Corporation is trying to choose between the following two mutually exclusive design projects:

Year

Cash flow(1)

Cash Flow(2)

0

-$40,000

-$15,000

1

21,000

8,500

2

21,000

8,500

3

21,000

8,500

1. If the required return is 10 percent and Robb Computer applies the profitability index decision rule, which project should the firm accept?

2. If the company applies the NPV decision rule, which project should it take?

3. Explain why your answers in (a) and (b) are different.

 

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