90.2K

Verified Solution

Link Copied!

profitability index

accept/reject

investot

will/will not

greater than or equal to 1

greater than or equal to $1

Estimating the cash flow generated by si invested in a project The profitability index (PI) is a capital budgeting tool that is defined as the present value of a project's cash inflows divided by the absolute value of its initiaf cash outflow. Consider this case: D Purple Whale Foodstuffs Inc. is considering investing $2,500,000 in a project that is expected to generate the following net cash flows: Year Year 1 Year 2 Cash Flow $375,000 $425,000 Year $425,000 $400,000 Year 4 Purple Whale Foodstuffs Inc. uses a WACC of 10% when evaluating proposed capital budgeting projects. Based on these cash flows, determine this project's PI (rounded to four decimal places); 0.4882 O 0.4625 O 0.5139 0.6167 Purple Whale Foodstuffs Inc.'s decision to accept or reject this project is independent of its decisions on other projects. Based on the project's PI, the firm should the project By comparison, the NPV of this project is in the project because the project On the basis of this evaluation criterion, Purple Whole Foodstutis Inc. should increase the firm's value. when it has a PI of 1.0, it will have an NPV A project with a negative NPV will have a Pl that is

Answer & Explanation Solved by verified expert

See Answer