Question

Project Typhoon has a net present value of $10,000 and a profitability index of 1.01. Project Cyclone has a net present value of $10,000 and a profitability index of 1.10. If only one project could be undertaken, the organization should select __________.

a) Project Typhoon
b) Project Cyclone
c) Both projects
d) Neither project

Answer 1

Project Cyclone should be selected as it provides a higher return on investment.

Step-by-step explanation:

Net present value (NPV) and profitability index (PI) are two important financial tools used in project evaluation. NPV measures the difference between the present value of cash inflows and the present value of cash outflows, while PI calculates the ratio of the present value of cash inflows to the present value of cash outflows. In this case, project Typhoon has an NPV of $10,000 and a PI of 1.01, while project Cyclone has an NPV of $10,000 and a PI of 1.10.

To determine which project to select, we can rely on the profitability index. The profitability index is a measure of the value created per unit of investment. A higher profitability index indicates a higher return on investment. Project Cyclone has a higher PI of 1.10 compared to project Typhoon's PI of 1.01. Therefore, the organization should select Project Cyclone as it provides a higher return on investment.