Snaptile Company Evaluates Future Projects by Using the Profitability Index

Snaptile Company evaluates future projects by using the profitability index. The company is currently reviewing three projects similar in nature and must choose one of the following: $\begin{array} { l l l r } \text { Project } & \text { Initial Investment } && \begin{array} { l } \text { Present Value of Cash } \\\text { Inflows }\end{array} \\1 & \$ 400,000 && \$ 300,000 \\2 & 200,000 & & 320,000 \\3 & 350,000 & & 430,000\end{array}$ Which project should Snaptile select if the decision is based entirely on the profitability index?

A) Project 1 with a profitability index of 0.75.
B) Project 1 with a profitability index of 1.33.
C) Project 2 with a profitability index of 1.60.
D) Project 2 with a profitability index of 0.67.
E) Project 3 with a profitability index of 0.81.

Correct Answer:

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