Calculations for eac-profitability index for each project

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Reference no: EM132028808

1. You are comparing mutually-exclusive investment projects and your firm has capital rationing constraints of $25 million. Project A requires an initial investment of $10 million and will generate cash flows of $4.5 million a year for the next four years. Project B requires an initial investment of $25 million and will generate cash flows of $7.9 million each year for the next five years. Assume that the projects are of equal risk and that the discount rate for both projects is 10%. Taking the scale difference into consideration, which is the better project? Please show calculations for EAC and the Profitability Index for each project in your answer.

A. Project B, since it has a higher expected net present value.

B. Project A, since it has a higher expected profitability index.

C. Project B, since it has a higher expected equivalent annuity.

D. Neither, since both projects are expected to create identical value.

2. Donald Gilmore has $100,000 invested in a 2-stock portfolio. $40,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?

a. 0.95

b. 1.09

c. 1.16

d. 1.23

e. 1.02

Reference no: EM132028808

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