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Suppose your firm is considering investing in a project with the cash flows shown below, that...

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Finance

Suppose your firm is considering investing in a project with thecash flows shown below, that the required rate of return onprojects of this risk class is 9 percent, and that the maximumallowable payback and discounted payback statistics for the projectare 2.0 and 3.0 years, respectively.

Time:0123456
Cash flow:–$7,100$1,100$2,300$1,500$1,500$1,300$1,100

Use the PI decision rule to evaluate this project. (Donot round intermediate calculations and round your final answer to2 decimal places.)

PI=_____

Answer & Explanation Solved by verified expert
3.9 Ratings (401 Votes)

Calculation of profitability Index (PI) of the project
Profitability Index = Present value of future cash inflows / Initial Investment
PI rule states that , if PI is greater than 1 then accept the project otherwise not.
Present value of future cash inflows
Year Cash flow Discount Factor @ 9% Present Value
1 $1,100.00           0.91743 $1,009.17
2 $2,300.00           0.84168 $1,935.86
3 $1,500.00           0.77218 $1,158.28
4 $1,500.00           0.70843 $1,062.64
5 $1,300.00           0.64993 $844.91
6 $1,100.00           0.59627 $655.89
Present value of future cash inflows $6,666.76
Profitability Index = $6666.76 / $7100
Profitability Index = 0.94
PI is less than 1 , hence project should not be accepted.

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Transcribed Image Text

Suppose your firm is considering investing in a project with thecash flows shown below, that the required rate of return onprojects of this risk class is 9 percent, and that the maximumallowable payback and discounted payback statistics for the projectare 2.0 and 3.0 years, respectively.Time:0123456Cash flow:–$7,100$1,100$2,300$1,500$1,500$1,300$1,100Use the PI decision rule to evaluate this project. (Donot round intermediate calculations and round your final answer to2 decimal places.)PI=_____

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