Define the cash flows for both projects cash_flows_I = [-83000, 32900, 43000, 49000] cash_flows_II = [-41000, 12900, 30500, 24500] required_return = 0.16

Function to calculate Present Value (PV) of cash flows

def calculate_pv(cash_flows, rate): return sum(cf / (1 + rate) ** t for t, cf in enumerate(cash_flows))

Function to calculate Profitability Index (PI)

def calculate_pi(cash_flows, rate): pv_cash_inflows = calculate_pv(cash_flows[1:], rate) return pv_cash_inflows / abs(cash_flows[0])

Function to calculate Net Present Value (NPV)

def calculate_npv(cash_flows, rate): return calculate_pv(cash_flows, rate)

Calculate PI and NPV for both projects

pi_I = calculate_pi(cash_flows_I, required_return) pi_II = calculate_pi(cash_flows_II, required_return)

npv_I = calculate_npv(cash_flows_I, required_return) npv_II = calculate_npv(cash_flows_II, required_return)

(pi_I, pi_II, npv_I, npv_II)### Results: Profitability Index (PI):

• Project I: 1.282
• Project II: 1.400

Net Present Value (NPV):

• Project I: $8,710.30
• Project II: $8,483.27

Decisions:

1. Profitability Index Decision Rule: Since Project II has a higher PI (1.400 vs. 1.282), the company should select Project II.
2. Net Present Value Decision Rule: Since Project I has a slightly higher NPV ($8,710.30 vs. $8,483.27), the company should select Project I.

Would you like a step-by-step breakdown of the calculations or have further questions?

5 Related Questions:

1. How is the profitability index (PI) calculated, and why is it useful in decision-making?
2. What factors might lead to discrepancies between PI and NPV decisions?
3. How does the required return impact the NPV and PI results?
4. Can mutually exclusive projects lead to conflicting decision outcomes under different rules?
5. What are some limitations of using NPV and PI for project evaluation?

Tip:

Always double-check cash flow inputs and discount rates when performing investment appraisals to ensure precision in financial decision-making.