Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively.
Time: | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
Cash flow: | –$7,500 | $1,180 | $2,380 | $1,580 | $1,580 | $1,380 | $1,180 |
Use the PI decision rule to evaluate this project.
PI=___?
PI = Present value / initial investment
Present value = 1180 / (1 + 0.08)1 + 2,380 / (1 + 0.08)2 + 1,580 / (1 + 0.08)3 + 1,580 / (1 + 0.08)4 + 1380 / (1 + 0.08)5 + 1180 / (1 + 0.08)6
Present value = $7,231.466065
PI = 7,231.466065 / 7,500
PI = 0.96
Suppose your firm is considering investing in a project with the cash flows shown below, that...
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