Answer:
b) Accept Project R and reject Project Q
Explanation:
We can use the following method to solve the given problem in the question
We are given
Project Q: Initial Cost = $ 257,412
Projected Cash Flows: Yr 1 : $ 123,300 Yr 2 : $ 180,300
Total Present Value of all the Future Cash Flows using 12.2% as Rate of Return
= 123,300/1.122 + 180,300/(1.122*1.122)
= 109,893 + 143,222
= $ 253,115
Profitability Index = Total Present Values of all Cash Inflows / Initial Investment
= 253,115 / 257142 = 0.98
Since the Initial Investment is greater than the Present Value of Cash Inflows, that is, l Profitability Index < 0 the Project should not be selected.
Project R: Initial Cost = $ 345,000
Projected Cash Flows: Yr 1 : $ 184,500 Yr 2 : $ 230,600
Total Present Value of all the Future Cash Flows using 12.2% as Rate of Return
= 184,500/1.122 + 230,600/(1.122*1.122)
= 164,438.5 + 183,178
= $ 347,616.5
Profitability Index = Total Present Values of all Cash Inflows / Initial Investment
= 347,616.5 / 345,000 = 1.01
Since the Initial Investment is lower that the Present Value of the Cash Inflows, that is, Profitability Index > 0 the Project should be selected.
Accept Project R and Reject Project Q, so option B is the correct answer
