A Company Is Considering Two Projects, Project a and Project

question 77

Essay

A company is considering two projects, Project A and Project B. The following information is available for each project:
$\begin{array} { l r r } &{ \text { Project A } } &{ \text { Project B } } \\\text { Investment } & \$ 2,500,000 & \$ 2,000,000 \\\text { Net present value of cash flows } &\$ 900,000 & \$ 800,000\end{array}$
Calculate the profitability index for each project. Based on the profitability index, which project should the company pursue and why?

---

Definitions:

Balancing

The act of ensuring that financial records or accounts are correct by making the total amounts of debits and credits equal.

Stockholders' Equity Account

represents the equity stake that shareholders have in a company, calculated as the company's total assets minus its total liabilities.

Common Stock

A type of equity security that represents ownership in a corporation, providing voting rights and entitling the holder to a share of the company's success through dividends and capital appreciation.

Stockholders' Equity

The net value of a corporation's assets after paying off all debts, showcasing the share of ownership belonging to shareholders.