Assignment
NPV (Net Present Value) versus PI (Profitability Index)
|
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?