Question

11. Profitability index Aa Aa E Estimating the cash flow generated by $1 invested in a project The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value of its initial cash outflow. Consider this case: Purple Whale Foodstuffs is considering investing $2,750,000 in a project that is expected to generate the following net cash flows: Year Year 1 Year 2 Year 3 Year 4 Cash Flow $325,000 $450,000 $450,000 $500,000 Purple Whale Foodstuffs uses a WACC of 7% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI (rounded to four decimal places): O 0.6046 O 0.4994 O 0.6308 0.5257 Purple Whale Foodstuffs's decision to accept or reject this project is independent of its decisions on other projects. Based on the project's PI, the firm should the project. By comparison, the NPV of this project is . On the basis of this evaluation criterion, Purple Whale Foodstuffs should in the project because the project increase the firm's value. A project with a negative NPV will have a PI that is ; when it has a PI of 1.0, it will have an NPV

Answer 1

Profitability year Andor!! Cash flow Puf@ 77 32.000 09346 4,50000 0.8734 4520000:8163 5.00000 Pud cash flow 303745 393030 367335 381450 HESCOLASSCO 0.7629 Puod at Pratitability Radex: Put of 0-5257 1445560 O 9250000 PO 20.5257 1 The firm should Not accept the Project NAV21445560-2750000:-13041040 in By Congaring NPV of the project is Negative On the basis of this evaluation Criterion. Purple whale food stuft should (not invest in the project because the Project (does not incread firmy value in A Project with a Negative NPV will have a pl that is Lii When it has a Pl of 1.0 it will have an alpy (zero)