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Suppose a company wanted to double the firm’s value with the next round of capital budgeting...

Suppose a company wanted to double the firm’s value with the next round of capital budgeting project decisions. To what would it set the PI benchmark to make this goal? (LG13-6)

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Answer #1

Firm wants to make its value double. It means investment made in capital budgeting projects should provide double cash flow of investment made.

So cash inflow provided = 2

Investment made = 1

Profitability index = Cash inflows/cash outflows

2/1 = 2

So firm should set the PI benchmark to 2 to make this goal.

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