a)
Attaching the values and formulas used :-
b)
Since, projects are independent and P.I Index of Project B (1.10) > P.I Index of Project A (1.01), we will accept Project B
c)
If Projects are mutually exclusive, we will accept Project B as it has a higher P.I Index
d)
A drawback of P.I to evaluate mutually exclusive projects is that, where the initial investments are different, P.I may not indicate the correct decision
6. Evaluate the following projects, using the profitability index. Assume a cost of capital of 11%....
Rank the following mutually exclusive projects based on profitability index (PI). Cost of capital = 6%. Project Initial Investment Cash flow 1 Cash flow 2 A 500 300 250 B 600 450 300 C 450 300 300
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: Happy Dog Soap Company is considering investing $2,500,000 in a project that is expected to generate the following net cash flows: Happy Dog Soap Company uses a WACC of 9% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI (rounded...
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...
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: Happy Dog Soap Company 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 $350,000 $450,000 $475,000...
Problem 7-14 Problems with Profitability Index The Bosa Corporation is trying to choose between the following two mutually exclusive design projects: Year Cash Flow (1) -$ 66,000 29,000 29,000 29,000 Cash Flow (II) -$17,800 9,600 9,600 9,600 a-1 If the required return for both projects is 10 percent, what is the profitability Index for both projects? (Do not round Intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.) Profitability Index Project I Project II a-2 If the...
6) A firm is evaluating three mutually exclusive capital budgeting projects. The net present value of each project is shown below. Given this information, which project() should the firm accept? Project 1 100,000 NPV, S Project 2 10,000 Project 3 - 100,000 a) accept Projects 1 and 2, and reject Project 3 b) accept Projects 1 and 3, and reject Project 2 c) accept Project 3, and reject Projects 1 and 2 d) accept Project 1, and reject Projects 2...
Gold Mining, Inc. is using the profitability index (PI) when evaluating projects. Gold Mining’s cost of capital is 5.18 percent. What is the PI of a project if the initial costs are $2,290,428 and the project life is estimated as 10 years? The project will produce the same after-tax cash inflows of $534,517 per year at the end of the year.
Gold Mining, Inc. is using the profitability index (PI) when evaluating projects. Gold Mining’s cost of capital is 11.35 percent. What is the PI of a project if the initial costs are $2,118,606 and the project life is estimated as 5 years? The project will produce the same after-tax cash inflows of $479,544 per year at the end of the year.
Gold Mining, Inc. is using the profitability index (PI) when evaluating projects. Gold Mining's cost of capital is 13.09%. What is the PI of a project if the initial costs are $2,472,241 and the project life is estimated as 6 years. The project will produce the same after-tax cash inflows of $630,586 per year at the end of the year. Round the answer to two decimal places.
(3 marks) QUESTION 6 (6 marks) Consider the following two mutually exclusive projects: Year Cash Flow (A) Cash Flow (B) $20,000 10, 000 10, 000 10, 000 10, 000 - $315, 000 25, 000 250, 000 55, 000 400, 000 The required return is 15% for both projects. Required: a) Which project should be accepted based on the net present value (NPV) and profitability index (PI) capital budgeting techniques? (4 marks) b) Explain why mutually exclusive projects might give rise...