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Based on the profitability index (PI) rule, should a project with the following cash flows be...

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
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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.

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