Question

Based on the profitability index (PI) rule, should a project
with the following cash flows be accepted if the discount rate is
8%? Why Year or why not? Cash Flow $18,600 S10,000 I$7,300 I$3,700
2 yes,because the Pl is 1.008 yes; because the Pl is 0.992. yes;
because the Pl is 0.999 no; because the Pl is 1.008 no because the
Pl is 0,992

Answer #1

Profitability index = Present value of future cash inflow / Initial investment

Project should be accepted only if PI is 1 or more than 1. Because if profitability index is less than 1 that shows project is not able to recover its initial cost.

Discount rate = 8%

All the projects which has PI less than 1 should not be accepted. since it will result in loss.

Given options are as follow:-

Yes; PI is 1.008

Yes; Pi is 0.992

Yes; PI is 0.999

No; PI is 1.008

No; PI is 0.992

**Answer:- Yes project should be accepted if the PI is
1.008 since it gives return higher than its initial
cost.**

Based on the profitability index rule, should a project with the
following cash flows be accepted if the discount rate is 15
percent? Why or why not? (i.e. Calculate the profitability index
(PI) and explain why the project should or should not be
accepted.)
Year: 0,1,2,3
Cash Flow: -32100, 11,800, 0, 22,600

Profitability index
Estimating the cash flow generated by $1 invested in
investment
The profitability index (PI) is a capital budgeting tool that
provides another way to compare a project’s benefits and costs. It
is computed as a ratio of the discounted value of the net cash
flows expected to be generated by a project over its life (the
project’s expected benefits) to its net cost (NINV). A project’s PI
value can be interpreted to indicate a project’s discounted return
generated...

9. Profitability index
Estimating the cash flow generated by $1 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 initial cash outflow. Consider this
case:
Purple Whale Foodstuffs Inc. is considering investing $2,225,000
in a project that is expected to generate the following net cash
flows:
Year
Cash Flow
Year 1
$350,000
Year 2
$400,000
Year 3...

11. Profitability index Estimating the cash flow generated by $1
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 initial cash
outflow. Consider this case: Purple Whale Foodstuffs is considering
investing $3,225,000 in a project that is expected to generate the
following net cash flows: Year Cash Flow Year 1 $375,000 Year 2
$475,000 Year 3 $400,000...

What is the profitability index of a project with the following
cash flows if the discount rate is 10 percent? Year CFs 0 -802 1
761 2 497 3 376

Profitability index. Given the discount rate and the future cash
flow of each project listed in the following table, use the PI to
determine which projects the company should accept.
What is the PI of project A?
What is the PI of Project B?
Cash Flow
Project A
Project B
Year 0
−$2,000,000
−$2,300,000
Year 1
$600,000
$1,150,000
Year 2
$700,000
$1,050,000
Year 3
$800,000
$950,000
Year 4
$900,000
$850,000
Year 5
$1,000,000
$750,000
Discount rate
5%
16%

Profitability Index (PI)
Show formulas
Wild Horse Corporation is considering a major expansion that
will cost SAR 22,000,000.
Annual cash flows from the project are expected to be SAR
4,950,000 for 6 years.
The firm uses a discount rate of 8%.
Calculate the Profitablility Index (PI) of the project. (Round
to 2 decimal places.)

A project has the following cash flows. Should the company
accept this project based on the Payback Period if the firm
requires a payback of 3.0 years?
Year Cash Flow
0 -$28,000
1 11,600
2 11,600
3 6,500
4 6,500
Yes, because the Payback Period is 3.33 years
Yes, because the Payback Period is 2.74 years
No, because the Payback Period is 2.74 years
Yes, because the Payback Period is 2.49 years

What is the profitability index for the following set of cash
flows if the relevant discount rate is 10 percent? What if the
discount rate is 15 percent? If it is 22 percent? Year Cash
Flow
0 -16,700
1-9,700
2 -7,800
3 - 4,300

Estimating the cash flow generated by $1 invested in investment
The profitability index (PI)is a capital budgeting tool that
provides another way to compare a project’s benefits and costs. It
is computed as a ratio of the discounted value of the net cash
flows expected to be generated by a project over its life (the
project’s expected benefits) to its net cost (NINV). A project’s PI
value can be interpreted to indicate a project’s discounted return
generated by each dollar...

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