Question

The profitability index (PI) of a project is 1.1, and the initial investment (cost) is $10,000

. What do you know about the project's net present value (NPV) and its internal rate of return (IRR)?

Answer #1

**Profitability Index = Present Value of Cash Flows /
Initial Investment**

1.1 =Present Value of Cash Flows / 10,000

Present Value of Cash Flows= 10,000 * 1.1

**Present Value of Cash Flows = $11,000**

Now, We know that

Net Present Value = Present Value of Cash flows - Initial Investment

= 11,000 - 10,000

**Net present value = $1000**

Internal rate of return : The Irr is the average return of the project gives through all the years of operations.

Initial Investment = Present value of cash flows / (1 + Internal rate of return)

10,000 = 11,000 / (1 + IRR)

(1 + IRR) = 11,000 / 10,000

(1 + IRR) = 1.1

IRR = 1.1 - 1

**IRR = 0.10 or 10%**

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The profitability index (PI) is a capital budgeting tool that
provides another way to compare a project’s benefits and costs. It
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flows expected to be generated by a project over its life (the
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The profitability index of a proposed investment project will
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negative if the proposed investment meets the cost of capital
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calculations. Round your answer to two decimal places.

If a project has a cost of $5,000 and a profitability index of
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____
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answer to two decimal places.

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cost of a project, then the project should be
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accepted because the internal rate of return is positive
accepted because the profitability index is less than 1.
accepted because the profitability index is negative.
accepted because IRR is higher than the discount rate.
rejected because the net present value is negative

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