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RST Corporation is contemplating two capital investment projects, Project Red and Project Blue. Both projects...

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Accounting

RST Corporation is contemplating two capital investment projects, Project Red and Project Blue. Both projects require an initial outlay of USD 80,000. The expected annual cash inflows are:

Year

Cash Flows (Project Red)

Cash Flows (Project Blue)

Initial Investment

(80,000)

(80,000)

1

30,000

25,000

2

25,000

30,000

3

20,000

25,000

4

20,000

20,000

a. Determine the Profitability Index (PI) for each project if the cost of capital is 6%.

b. Based on the PI, which project should the company choose?

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