Question

1. Investment consideration of $2,225,000
Cash flows
Year 1-   300,000
Year 2-   475,000
Year 3-   500,000
Year 4-   500,000
 
WACC  10% when evaluation proposed capital budgeting projects.
Determine the Projects PI based on these cash flow
A     .6834
B     .7456
C      .6213
D     .5902
 
2. The company’s decision to accept or reject this project is independent of its decision on other projects.  Based on the projects PI should theiform accept or reject this project?
3. By comparison, the NPV of the project is _____?____. On the basis of the evaluation Citation, the company should (Invest or Not invest )  in the project because the project  (will or will not) Increase the firms value?  
4.A Project with e Negatives NPV will have a  PI that is (Greeter than,  Equal to,  or less than 1.0); When it has a PI of 1.0, it will have an NPV of (Less than, Greater than or Equal to)  $0?

Answer 1

1. Profitability index = present value of cash inflow÷present value of cash outflow.
= 0.6213

C. 0.6213

2. Reject the project because profitability index is less than 1.

3. Npv = net present value= present value of cash inflow- present value of cash outflow.
Npv = -842,546.62

4. A Project with e Negatives NPV will have a PI that is less than 1.0
When it has a PI of 1.0, it will have an NPV of Equal to $0.