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Read the scenario. You are the financial manager of a firm that is contemplating investing $25,000...

Read the scenario.

You are the financial manager of a firm that is contemplating investing $25,000 in a new project that you expect will generate cash flows of $10,000 per year for five years and then $15,000 per year for another two years. At the end of seven years you expect to sell the project's assets for $50,000. You believe that you should earn at least 14% to compensate the shareholders for the project's risk.

  • What is the Profitability Index?
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Answer #1

YEAR 0 1 cash flows -$25,000 $10,000 $10,000 $10,000 $10,000 $10,000 $15,000 $65,000 NPV pv @ 14% 1.0000 0.8772 0.7695 0.6750

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