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16 February, 09:18

Selma Inc. is comparing several alternative capital budgeting projects as shown below:ProjectsA B CInitial investment $80,000 $120,000 $160,000Present value of net cash flows 90,000 110,000 200,000Using the profitability index, the projects rank as

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  1. 16 February, 09:20
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    The rank will be

    1. Project C

    2. Project A

    3. Project B

    Explanation:

    The profitability index formula is

    (NPV + Initial investment) : Initial Investment

    We have to get this index for each project

    Project A ($80,000+90,000) : $80,000=2. 125

    Project B ($120,000 + 110,000) : $120,00 = 1.916

    Project C ($160,000 + 200,000) : $160,000 = 2.25

    The higher profitability index is from Project C, then Project A and finally Project B
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