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Compute the PI statistic for Project X and note whether the firm should accept or reject...

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Finance

Compute the PI statistic for Project X and note whether the firmshould accept or reject the project with the cash flows shown belowif the appropriate cost of capital is 6 percent. Time: 0 1 2 3 4 5Cash flow:-84 -84 0 109 84 59

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3.9 Ratings (512 Votes)

Ans) 1.46, The firm should accept the project since PI is greater than 1.

Year Project Cash Flows (i) DF@ 6% DF@ 6% (ii) PV of Project A ( (i) * (ii) )
1 -84 1/((1+6%)^1) 0.943                           (79.25)
2 0 1/((1+6%)^2) 0.890                                    -  
3 109 1/((1+6%)^3) 0.840                             91.52
4 84 1/((1+6%)^4) 0.792                             66.54
5 59 1/((1+6%)^5) 0.747                             44.09
Total                           122.90
Total of PV of Cash Inflows 122.90
Cash Outflows 84
Profitability Index = 1.46
Present value of cash Inflow / Initial Investment (Cash Outflows) (122.90 / 84)

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Compute the PI statistic for Project X and note whether the firmshould accept or reject the project with the cash flows shown belowif the appropriate cost of capital is 6 percent. Time: 0 1 2 3 4 5Cash flow:-84 -84 0 109 84 59

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