Question

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. ??Cash Flow Project A Project B ??Year 0 minus?$2 comma 100 comma 000 minus?$2 comma 500 comma 000 ??Year 1 ?$650 comma 000 ?$1 comma 250 comma 000 ??Year 2 ?$750 comma 000 ?$1 comma 150 comma 000 ??Year 3 ?$850 comma 000 ?$1 comma 050 comma 000 ??Year 4 ?$950 comma 000 ?$950 comma 000 ??Year 5 ?$1 comma 050 comma 000 ?$850 comma 000 ??Discount rate 6?% 14?% What is the PI of project? A? nothing???(Round to two decimal? places.)

Answer #1

Project A:

Discount Rate = 6%

Present Value of Cash Inflows = $650,000/1.06 + $750,000/1.06^2
+ $850,000/1.06^3 + $950,000/1.06^4 + $1,050,000/1.06^5

Present Value of Cash Inflows = $3,531,491.33

Profitability Index = Present Value of Cash Inflows / Initial
Investment

Profitability Index = $3,531,491.33 / $2,100,000

Profitability Index = 1.68

Project B:

Discount Rate = 14%

Present Value of Cash Inflows = $1,250,000/1.14 +
$1,150,000/1.14^2 + $1,050,000/1.14^3 + $950,000/1.14^4 +
$850,000/1.14^5

Present Value of Cash Inflows = $3,694,038.61

Profitability Index = Present Value of Cash Inflows / Initial
Investment

Profitability Index = $3,694,038.61 / $2,500,000

Profitability Index = 1.48

So, Company should select Project A due to higher PI

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.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.
Cash Flow
Project A
Project B
Year 0
−$2,000,000
−$2,600,000
Year 1
$400,000
$1,300,000
Year 2
$550,000
$1,150,000
Year 3
$700,000
$1,000,000
Year 4
$850,000
$850,000
Year 5
$1,000,000
$700,000
Discount rate
6%
14%
What is the PI of project A?

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...

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...

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

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

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

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...

Given the following cash flows.
A profitability index equal to 1.164615
A12% discount rate.
Estimate the initial outlay and the MIRR.
Years
CFt
0
XXX,000?
1
$275,000
2
$275,000
3
$275,000
4
$275,000
5
$275,000
6
$0
7
($150,000)

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