Question

Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

Project Z

Time	0				1				2				3				4				5
Cash Flow	–$	1,000			$	350			$	380			$	420			$	300			$	100

Multiple Choice

• The project's PI is 8.48 percent and the project should be rejected.

• The project's PI is 16.48 percent and the project should be accepted.

• The project's PI is 21.48 percent and the project should be accepted.

• The project's PI is 8.48 percent and the project should be accepted.

Answer 1

Answer:

Correct answer is:

The project's PI is 21.48 percent and the project should be accepted.

Explanation:

Profitability index in decimal is calculated below:

Time Cash flows 0 -$1,000 1 $350 2 $380 3 $420 $300 $100 PV of cash inflows $1,214.78 PI= 1.2148

Profitability index is (in decimal) 1.2148 . It can also be experessed as 21.48% over intial investment.

As such option C is correct and other options A, B and D are incorrect.

Above excel with 'show formula' is as follows:

D 12 E 3 420 F 4 300 5 100 380 А C 1 Time 2 Cash flows -1000 350 3 4 PV of cash inflows =NPV(10%,C2:52) 5 PLN =B4/-B2 6