Compute the Pl statistic for Project Z if the appropriate cost of capital is 8 percent...

Question

Question

Answer 1

Answer #1

PV of future Cash Flows can be calculated as

CF1/(1+R)^1 + CF2/(1+R)^2 +..+CFN/(1+R)^N

470/1.08^1+600/1.08^2+770/1.08^3+420/1.08^4+220/1.08^5

470/1.08+600/1.1664+770/1.259712+420/1.36048896+220/1.4693280768

435.185185185+514.403292181+611.250825586+308.712538175+149.728303347

2019.28014447

Profitability index = PV of future Cash Flows / Initial Investment

= 2019.28014447/1600

= 1.26

Usually invest having PI>1 should be accepted. So accept the project Z.

Answer 2

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