NPV (Net Present Value) versus PI (Profitability Index)

Feb 3rd, 2012
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Course: Business and Management
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NPV (Net Present Value) versus PI (Profitability Index) Consider the following two mutually exclusive projects available to Global Investments, Inc.: Projects C0 C1 C2 PI NPV A -$1000 $1000 $500 1.32 $322 B -500 500 400 1.57 285 The appropriate discount rate for the projects is 10%. Global Investments chose to undertake project A. At a luncheon for shareholders, the manager of a pension fund that owns a substantial amount of the firm’s stock asks you why the firm chose project A instead of project B when project B has a higher PI. How would you, the CFO, justify your firm’s action? Are there any circumstances under which Global Investments should choose project B?

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