Question

Project Boulder has a payback period of 2.4 years, an NPV of $10,000, and a profitability index of 1.10. Project Flintstone has a payback period of 3.0 years, an NPV of $10,000, and a profitability index of 1.05. If only one project can be executed, which project should be selected? Explain your reasoning.

a) Project Boulder
b) Project Flintstone
c) Either project, as they have the same NPV
d) Need more information to decide

Answer 1

Project Boulder should be selected based on its shorter payback period, higher NPV, and higher profitability index.

Step-by-step explanation:

To determine which project should be selected, we can consider the payback period, NPV, and profitability index of both projects. Project Boulder has a payback period of 2.4 years, an NPV of $10,000, and a profitability index of 1.10. Project Flintstone has a payback period of 3.0 years, an NPV of $10,000, and a profitability index of 1.05. The payback period is the time it takes for the savings to equal the capital cost of the investment, so the shorter the payback period, the better. In this case, Project Boulder has a shorter payback period, so it would be the more favorable choice. Additionally, the higher NPV and profitability index of Project Boulder also indicate that it would be the better option.