You Are Considering the Following Two Mutually Exclusive Projects Based Upon the Profitability Index (PI) and the Information Provided

question 34

Multiple Choice

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.
$\begin{array}{l}\begin{array} { | l | l | l | } \hline \text { Year } & \text { Project A } & \text { Project B } \\\hline 0 & £ 75,000 & £ 70,000 \\\hline 1 & £ 19,000 & £ 10,000 \\\hline 2 & £ 48,000 & £ 16,000 \\\hline 3 & £ 12,000 & £ 72,000 \\\hline\end{array}\\\begin{array} { | l | l | l | } \hline & \text { Project A } & \text { Project B } \\\hline \text { Required rate of return } & 10 \% & 13 \% \\\hline \text { Required payback period } & 2.0 \text { years } & 2.0 \text { years } \\\hline \text { Required accounting return } & 8 \% & 11 \% \\\hline\end{array}\end{array}$
Based upon the profitability index (PI) and the information provided in the problem, you should:

• A)accept both project A and project B.
• B)accept project A and reject project B.
• C)accept project B and reject project A.
• D)reject both project A and project B.
• E)disregard the PI method in this case.

---

Definitions:

Mobile Phone Store

A retail outlet specializing in the sale of mobile phones and related accessories and services.

Portfolio Return

The overall gain or loss generated by an investment portfolio over a specific time period, typically expressed as a percentage.

Covariance

A statistical measure that indicates the extent to which two variables change together.

Variances

Variances measure the dispersion of a set of data points around their mean value, indicating how spread out the data is.