Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 10 percent, and the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively.

Time: 0 1 2 3 4 5

Cash flow -$351,000 $66,000 $85,000 $142,000 $123,000 $82,200

Use the PI decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

PI

Answer 1

Profitability index= Present value of cashinflows/Initial cashflow
Year	Cashflow	Present value@10%	Discounted cashflow
1	66000	0.909	60000
2	85000	0.826	70247.93
3	142000	0.751	106686.70
4	123000	0.683	84010.66
5	82200	0.621	51039.73
	a)	Present value of cashinflows	371985.02
	b)	Initial cashoutflow	351000
		Profitability index = a/b	1.06
	Since the PI>1, the project can be accepted