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Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below. The required rate of return on projects of both of their risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the projects are 2 and 3 years, respectively.
TIME: 0 1 2 3
Project A CF: $ - 10,000 $ 10,000 $ 30,000 $ 3,000
Project B CF: $ - 30,000 $ 10,000 $ 20,000 $ 50,000
Use the Profitability Index (PI) decision rule to evaluate these projects; what is the PI for each project, and which one(s) should it be accepted or rejected?