9. Profitability index Estimating the cash flow generated by $1 invested in a project The profitability...

60.1K

Verified Solution

Question

Finance

9. Profitability index Estimating the cash flow generated by $1invested in a project The profitability index (PI) is a capitalbudgeting tool that is defined as the present value of a projectâ€™scash inflows divided by the absolute value of its initial cashoutflow. Consider this case: Happy Dog Soap Company is consideringinvesting $2,750,000 in a project that is expected to generate thefollowing net cash flows: Year Cash Flow Year 1 $275,000 Year 2$500,000 Year 3 $475,000 Year 4 $475,000 Happy Dog Soap Companyuses a WACC of 8% when evaluating proposed capital budgetingprojects. Based on these cash flows, determine this projectâ€™s PI(rounded to four decimal places): 0.4869 0.5125 0.5638 0.4613 HappyDog Soap Companyâ€™s decision to accept or reject this project isindependent of its decisions on other projects. Based on theprojectâ€™s PI, the firm should (ACCEPT or REJECT) the project? Bycomparison, the NPV of this project is (-$1,340,491, -$1,608,589,or -$1,072,343)?. On the basis of this evaluation criterion, HappyDog Soap Company should INVEST or NOT INVEST in the project becausethe project WILL or WILL NOT increase the firmâ€™s value.

Answer & Explanation Solved by verified expert

3.6 Ratings (457 Votes)

Initial investment or Present value of Cash outflow 2750000 Calculation of Present value of Cash inflows Year Cash flows PVF8 PV CFPVF 1 275000 09259259259 25462963 2 See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member