Finance Quiz
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CAPITAL BUDGETING
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A firm with a cost of capital of 10% is choosing between two mutually exclusive projects. Project S costs $100, has an NPV of $50 and an IRR of 30%. Project L costs $1,000, has an NPV of $200 and an IRR of 20%. The firm is not capital constrained. An analyst argues for Project S, stating that its Profitability Index (PI) is higher. Why is this reasoning inappropriate in this specific context?
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